Greenmail - Is It Just Passing The Buck

Pace Law Review
Volume 6
Issue 1 Fall 1985
Article 3
September 1985
Greenmail: Is It Just Passing the Buck?
Nancy A. Lester-Lawson
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Recommended Citation
Nancy A. Lester-Lawson, Greenmail: Is It Just Passing the Buck?, 6 Pace L. Rev. 69 (1985)
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Notes and Comments
Greenmail: Is It Just Passing The Buck?
I. Introduction
The practice of a corporation repurchasing its own stock
from a shareholder at an above market premium in order to
thwart a hostile takeover attempt is not new.' Its occurrence,
however, has increased dramatically in recent years.
2
The prac-
tice, known colloquially as "greenmail," has been referred to as
"corporate
blackmail" by the New York Times
3
and the Wall
Street Journal.
4
The House Committee on Energy and Com-
merce, in its report accompanying H.R. 5693,1 one of three
House bills proposed in 1984 to regulate the practice of green-
mail,
6
defined greenmail as "a maneuver in which a 'raider' who
1. See generally Bankers Sec. Corp. v. Kresge Dep't Stores, Inc., 54 F. Supp. 378 (D.
Del. 1944); Cheff v. Mathes, 41 Del. Ch. 494, 506, 199 A.2d 548, 555 (1964); Alcott v.
Hyman, 40 Del. Ch. 449, 456, 184 A.2d 90, 94 (1962), affd, 42 Del. Ch. 233, 208 A.2d 501
(1965); Kors v. Carey, 39 Del. Ch. 47, 54, 158 A.2d 136, 140 (1960). See also E. FOLK III,
THE DELAWARE GENERAL CORPORATE LAW 154 (1972).
2. See THE OFFICE OF THE CHIEF ECONOMIST, SECURITIES AND EXCHANGE COMMISSION,
THE IMPACT OF TARGETED SHARE REPURCHASES (GREENMAIL) ON STOCK PRICES, (Sept. 11,
1984) [hereinafter cited as SEC STUDY ON THE IMPACT OF GREENMAIL].
3. Lipton, The Minority Takeover Threat 'Greenmail' is a Corporate Disgrace,
N.Y. Times, Apr. 15, 1984, at F2, col. 3.
4. Leefeldt, 'Greenmail' Far From Disappearing Is Doing Quite Well in Disguised
Forms, Wall St. J., Dec. 4, 1984, at 14, col. 1 [hereinafter cited as Disguised Forms];
Leefeldt, Rise in 'Greenmail' Payoffs Spurs Challenges in Courts and Congress, Wall St.
J., May 2, 1984, 2, at 29, col. 4.
5. H.R. 5693, 98th Cong., 2d Sess., 130 CONG. REc. H4357-60 (daily ed. May 22,
1984). This bill, known as the "Tender Offer Reform Act of 1984," was first introduced
into the House of Representatives by Rep. Timothy Wirth (D-Colo.) on May 22, 1984.
See also infra note 226 and accompanying text.
6. This comment will refer only to the bills introduced in the House, H.R. 5693,
H.R. 5694 and H.R. 5695, 98th Cong., 2d Seas., 130 CONG. REC. H4357-60 (daily ed. May
22, 1984), introduced by Rep. Wirth, and not to similar companion bills introduced in
the Senate, S. 2777, 98th Cong., 2d Sess. (1984) by Sen. H. John Heinz (R-Pa.), S. 2782,
98th Cong., 2d Sess. (1984) by Sen. Alfonse D'Amato (R-N.Y.) and S. 2784, 98th Cong.,
2d Sess. (1984) by Sen. Alfonse D'Amato (R-N.Y.).
1
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has accumulated a large block of stock in a company threatens
to make a hostile bid for the company or to sell his block to
someone else to facilitate a hostile takeover, unless the target
buys him out at a high price .... ,7
The payment of greenmail, as one of a number of corporate
defensive maneuvers, has increased with the growing number of
hostile takeovers and hostile takeover attempts.' In the first
three months of 1984, the number of takeovers increased by
thirty-one percent over 1983, and the aggregate dollar value of
the transactions more than doubled to $48.3 billion." The 1984
statistics become significant when viewed in light of the fact that
the 2,500 mergers and acquisitions in 1983 was the greatest
number since 1974.10
Many factors have contributed to this surge in takeover ac-
tivity.
11
Higher interest rates made the purchase of existing fa-
cilities a more attractive, less expensive option than building
new facilities.
12
In addition, a depressed stock market made se-
curities investments an undervalued, inexpensive investment op-
tion.
s
As a result, companies previously insulated from takeover
attempts, either because of their size or overvalued stock, fell
prey to hostile raiders
4
who often sold asset-rich divisions to
7. HOUSE COMM. ON ENERGY AND COMMERCE, H.R. Doc. No. 1028, 98th Cong., 2d
Sess. 7, n.15 (1984) [hereinafter cited as HOUSE REPORT].
8. See SEC STUDY ON THE IMPACT OF GREENMAIL supra note 2, at 1.
9. Reiser, Corporate Takeovers: A Glossary of Terms and Tactics, 89 CASE & COM.,
Nov. - Dec. 1984, at 35. For a general discussion of merger activity in the past 10 years
see Sonenclar, How to Play the Merger Game for Profit, FIN. WORLD, Sept. 5-18, 1984, at
16.
10. See Reiser, supra note 9, at 35.
11. Williams, Frenzy and Style in the Merger Boom, N.Y. Times, Jan. 15, 1984, at
F1, col. 3. By the end of 1983, merger agreements were being signed at a rate of eight a
day. Moreover, aggressive proxies have proliferated and takeover bidding wars have be-
come virtually "common place." Id.
12. See infra note 15.
13. See Sonenclar, supra note 9, at 17. "One of the key measurements of takeover
eligibility, say experts, is market price in relation to book value, which is essentially the
valuation at which total assets are carried on a company's books, less depreciation, debt
and the value of any preferred shares." Moran v. Household Int'l, Inc., 490 A.2d 1059,
1078 (Del. Ch. 1985). This tactic is often referred to as a company's "break-up value"
and is utilized by a "bust-up artist," an acquiror who sells off corporate assets piecemeal
after acquisition. Id.
14. In this comment, the terms "raider," "greenmailer" and "acquisitor" will be
used relatively interchangeably to mean a dissident shareholder who acquires a signifi-
cant block of stock and who poses the threat of a hostile takeover or tender offer.
[Vol. 6:69
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GREENMAIL
help finance the takeover.
5
This heightened takeover activity has made the market
more susceptible to greenmail threats by corporate investors
who view greenmail as a lucrative alternative to actual take-
over." A record number of companies (575) repurchased their
own shares in buyback programs in 1984, compared with only
200 in 1983.1
7
Although the majority of these buybacks were re-
sponsive to concerns that corporate shares were undervalued in
the market (thereby making the company a prime takeover tar-
get),
"
' a significant number were actually greenmail payments.'
9
The largest greenmail payment occurred in March, 1984, when
Texaco, Inc. paid $1.28 billion to purchase the 9.9% stake held
by the Bass family of Texas.
20
This greenmail payment resulted
in a $400 million profit to the Bass family.
2 1
The practice of greenmail has been criticized for a variety of
reasons. First, as with certain other defensive corporate maneu-
15. Wayne, A Look at New Corporate Tactics, N.Y. Times, Feb. 26, 1984, 3, at F6,
col. 3. "It matters little that these companies are among America's mightiest; they still
become easy marks for the ravenous advances of others. Their sin was simple - fend off
the attack." Id. See also Rosenzweig, The Legality of "Lock- Ups" and Other Responses
of Directors to Hostile Takeover Bids or Stock Aggregations, 10 SEC. REG. L.J. 291
(1983). "Characteristics of vulnerability have included a sale or liquidation value higher
than market value, a significant unused debt capacity, a highly liquid financial condition,
a low price-earnings ratio, and widely held stock ownership, possibly including large
blocks of stock in institutional hands and limited ownership by management." Id. at 298.
16. See supra note 7, at 1. "Many of these large premium payments clearly were
made by target management to reduce the threat of losing control of the firm through a
tender offer or proxy fight." Id.
17. See supra note 9.
18. Many corporations now find themselves "in play" or "up for sale" in the increas-
ingly growing market for corporate takeovers. Such companies, known as "target compa-
nies" often attempt to repurchase their own stock on the market as a protectionist mea-
sure to prevent future takeover attempts. See Fisher, Oops! My Company is on the
Block, FORTUNE, July 23, 1984, at 16; Wayne, A Look at New Corporate Tactics, N.Y.
Times, Feb. 26, 1984, 3, at F6, col. 3.
19. See generally Williams, Companies' Stock Buybacks Soared in 1984 but Might
Slow This Year, Wall St. J., Jan. 2, 1985, at B6, col. 1, for tables entitled "Biggest Stock
Buybacks of 1984" and "Biggest Greenmail Deals of 1984." See also Work, "Greenmail"
- It's Legal, but is it Right? 96 U.S. NEWS & WORLD REP., June 25, 1984, at 75, containing
a table entitled "Profits from Buy-Backs in 1984"; Leading Deals and Deal Makers in
the First Half of This Year, N.Y. Times, July 3, 1984, at D6, col. 1, containing tables
entitled "Largest Mergers and Acquisitions" and "Merger Activity" and also brief biog-
raphies of some of the more well known greenmailers.
20. See Williams, supra note 19.
21. The Greenmail Blues, L.A. Daily J., May 31, 1984, at 4, col. 1.
1985]
3
PACE LAW REVIEW [Vol. 6:69
vers like "Pac-Man,
' ' 22
"lock-up" options,
23
"poison pill,"
24
"scorched
earth
' 2
and sale of the "crown jewel,
'2 6
the payment
of greenmail often constitutes a major, self-inflicted financial
blow to the target company.2
7
This, in turn, may cause stock val-
22. This practice, named after the popular video game, occurs when a target com-
pany threatens to "eat you before you eat me" in terms of a hostile takeover. In effect,
the target company threatens the raider with a takeover. The Pac-Man defense was used
by Martin Marietta to prevent a takeover by Bendix in a well-publicized battle. See
Martin Marietta Corp. v. Bendix Corp., 549 F. Supp. 623, 625 (D. Md. 1982).
23. Lock-up options are arrangements made by a target company with a preferred
acquisitor or "white knight" in which the target grants the "white knight" some sort of
option which, if exercised would make a hostile takeover either impossible or far less
attractive to the raider. These include "stock lock-ups," agreements to purchase treasury
shares or unissued stock of the target, and "asset lock-ups" which are options to
purchase some key assets of the target. Courts have differed as to the legality of these
maneuvers. See Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir. 1981), cert.
denied, 455 U.S. 982 (1982) ("lock-up" option granted to defendant corporation by tar-
get company during a tender offer constituted a violation of the Williams Act because
there were no indications that the offer was so inadequate as to justify the actions), cf.
Data Probe Acquisition Corp. v. Data Lab, Inc., 568 F. Supp. 1538 (S.D.N.Y. 1983),
rev'd, 722 F.2d 1 (2d Cir. 1983), cert. denied, 104 S. Ct. 1326 (1984).
24. A poison pill is any provision in a corporate charter or agreement that will ma-
ture upon a change in control and create problems for the acquisitor, often by severely
diluting the surviving entity's value, see Daniels, 'Poison Pill'; A Court Test, N.Y. Times,
Jan. 22, 1985, 2, at D2, col. 1, or diluting voting rights upon certain events. See Moran
v. Household Int'l, Inc., 490 A.2d 1059, 1066 (Del. Ch. 1985). A poison pill "rights plan"
was upheld by the court under the business judgment rule as serving a rational purpose
to fend off a hostile raid. Under this rights plan, each shareholder received one right for
each share of outstanding common stock. The right entitled the shareholder, over a 10
year period, to purchase one hundredth of a share of a new series of participating pre-
ferred stock. The right would only materialize upon certain "triggering" or "flipover"
events, i.e. any 20% acquisition by a shareholder or group of related shareholders, or a
tender offer or exhange offer for 30% of the company's outstanding stock. The net result
would be that a right holder would be able to purchase $200 worth of the acquiror's
common stock for $100, resulting in a significant dilution of the acquiror's capital.
25. A scorched earth policy encompasses any number of desperate attempts by tar-
get management to discourage the raider in the final hours of a takeover battle. These
include poison pill measures, see supra note 24, selling off the company's most finan-
cially attractive asset, the "crown jewel," see infra note 26, large last-minute dividend
payments to shareholders, etc. As stated in Minstar Acquiring Corp. v. AMF, Inc., No. 85
Civ. 3800 (MJL) (S.D.N.Y. June 7, 1985) (available Nov. 7, 1985, on LEXIS, Genfed
library, Dist file), a scorched earth policy means "[tihe offeror would be left with nothing
but smoldering ash."
26. The "crown jewel" is the target company's most lucrative asset and its sale cre-
ates a disincentive for the raider to acquire the corporation.
27. Takeover Tactics and Public Policy, 1984: Hearings on H.R. 5693 Before the
Committee on Energy and Commerce, Subcommittee on Telecommunications, Con-
sumer Protection, and Finance, 98th Cong., 2d Sess. 142 (1984) [hereinafter cited as
Hearings] (statement of Rep. Timothy Wirth (D-Colo.): "[c]ompanies have engaged in
GREENMAIL
ues to drop.
2 8
Second, the payment of greenmail has been criticized as in-
equitable because the corporation only offers to buy back its
stock at a premium from the raider, but does not make a similar
offer or self-tender
e
for the remainder of its outstanding
shares.
30
In this sense, the premium, operating akin to extortion-
ate payoff money, eliminates the threat of a corporate take-
over."
1
However, the remaining non-threatening shareholders do
not receive the benefit of this buyback offer by the corporation.
Third, the payment of greenmail has been criticized because
target management, by making the payment, is able to head off
a threatened takeover and effectively bypass the tender offer
process.
2
This prevents shareholders from benefitting from
higher stock market prices during a tender offer and serves to
enormous bank borrowings to conduct counteroffers and tender offers for their own
shares simply as defensive tactics." Id.).
28. There is some dispute as to whether the stock drop is caused by the end of the
takeover speculation or by the market reaction to the greenmail payment itself. See
Note, Greenmail: Targeted Stock Repurchases and the Management-Entrenchment
Hypothesis, 98 HAsv. L. REv. 1045 (1985). See infra notes 73-78 and accompanying text.
29. A "self-tender" is a tender offer conducted by the issuing company for its own
stock usually at a premium. See infra notes 49, 233 and accompanying text.
It should be noted that neither Congress nor the SEC has defined "tender offer."
SEC v. Carter Hawley Hale Stores, Inc., 587 F. Supp. 1248 (C.D. Cal. 1984), aff'd, 760
F.2d 945 (9th Cir. 1985). However, the SEC has adopted an eight-factor test to deter-
mine whether the stock purchaser has in fact made a tender offer. This test has met with
general approval in the courts, and not all factors need be present in order to find the
existence of a tender offer. These factors are: (1) active and widespread solicitation of
public shareholders for the shares of an issuer; (2) solicitation made for a substantial
percentage of the issuer's stock; (3) offer to purchase made at a premium over the pre-
vailing market price, (4) terms of the offer are firm rather than negotiable; (5) offer con-
tingent on the tender of a specific number of shares, often subject to a fixed maximum
number to be purchased; (6) offer open only for a limited period of time; (7) offeree
subjected to pressure to sell his stock; and (8) the public announcements of a purchasing
program concerning the target company precede or accompany rapid accumulation of a
large amount of target company's securites. SEC v. Carter Hawley Hale Stores, Inc., 587
F. Supp. 1248 (C.D. Cal. 1984), aff'd, 760 F.2d 945 (9th Cir. 1985); Zuckerman v. Franz,
573 F. Supp. 351, 358 (S.D. Fla. 1983); Wellman v. Dickinson, 475 F. Supp. 783, 823-24
(S.D.N.Y. 1979), afl'd, 682 F.2d 355 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983).
30. See infra notes 35-44 and accompanying text for definitions of greenmail.
31. See supra notes 3, 4, 30 and accompanying text.
32. See Note, Buying Out Insurgent Shareholders with Corporate Funds, 70 YALE
L.J. 308 (1960). "Moreover, the use of corporate funds to buy out insurgents is offensive
to the underlying premise of the proxy-expenditure doctrine - that decisions about pol-
icy and management in contests for control should be made by the stockholders." Id. at
313.
1985]
5
PACE LAW REVIEW
entrench the incumbent management by eliminating any threat
to a change in it.
38
This comment will explore the dimensions of the greenmail
problem and examine the extent to which three draft Congres-
sional bills, proposed in 1984 by Rep. Timothy Wirth (D-Colo.),
might solve the problem. Part II reviews various definitions of
greenmail and compares differing points of view regarding the
nature of the perceived wrongdoing. Part III examines whether
greenmail should be regulated by determining if it causes actual
harm to shareholder interests and whether existing legal and
commercial mechanisms are sufficient to handle the problem.
Part IV analyzes the provisions of H.R. 5693, H.R. 5694 and
H.R. 5695 as possible ways to amend the Securities and Ex-
change Act of 1934 to regulate greenmail. Part V concludes that
there is a need to regulate greenmail, but that none of the three
proposed bills in their present form offers a realistic solution.
The author proposes, however, that certain provisions of H.R.
5693 may be useful as guidelines to establish earlier disclosure
requirements. These earlier disclosure regulations could be im-
plemented through changes in sections 13(d) and 13(e) of the
Exchange Act. In addition, a substantive change could be made
in section 14(e) of the Exchange Act, counteracting the Supreme
Court's most recent interpretation, to include certain "manipu-
lative" acts between issuer and shareholder. When combined,
these changes in the federal securities laws would enable a com-
plaining shareholder to seek injunctive relief in the federal
courts against the payment of greenmail.
33. When management "pays off" the potential raider, the shareholders are de-
prived of the opportunity to tender their shares at an above-market price. The tender
offer is either never made or withdrawn, and the raider never achieves the status of
majority shareholder to challenge the existing management's status. Moreover, the "pay-
off"' to the raider ensures that he will not attempt a proxy contest, since his potential
threat as a major shareholder is eliminated by the repurchase of his shares. The share-
holders are denied an opportunity to profit from a tender offer and the possibility of a
proxy battle for a change in corporate control. By eliminating its opposition, manage-
ment entrenches itself in the corporation.
[Vol. 6:69
GREENMAIL
II. Definitions of Greenmail
The term "greenmail" does not appear in Webster's Dic-
tionary or the Oxford Shorter.
34
Commentators have suggested
that the word may have evolved from "greenback," which is
United States paper currency printed with green ink.
33
Syno-
nyms for greenmail include "targeted share repurchase" and
"targeted buyout."
36
Furthermore, no formal definition of green-
mail exists elsewhere. The variety of existing informal defini-
tions appears to reflect a deeper conflict and disagreement as to
exactly what type of transaction constitutes greenmail and
which party to the transaction has committed the wrongdoing.
7
The following sample definitions are illustrative of this con-
flict: 1) the House Committee on Energy and Commerce report
accompanying H.R. 5693 defined greenmail as a "threat to make
a hostile bid"
s
(this definition views the raider as the wrong-
doer); 2) "a ploy in which a financial sharpshooter creates a
takeover threat by purchasing a chunk of a company's stock"
39
(this definition emphasizes the relationship of the purchase of
stock by the raider with the perception of a threat by the target
and views the raider as the wrongdoer); 3) "the repurchase of
stock from an unwanted suitor at a higher-than-market price,
(this definition appears to regard the target as the wrongdoer by
defining the practice in terms of the repurchase of stock); 4)
"[t]he term 'greenmail' refers to the practice of buying out a
takeover bidder's stock at a premium that is not available to
34. Owles, Corporations, NEw L.J., July 13, 1984.
35. Id.
36. See SEC STUDY ON THE IMPACT OF GREENMAIL, supra note 2.
37. Raiders often deny that they have threatened greenmail and targets often deny
that the repurchase of stock was in fact a greenmail payment. See Donovan, The Cash
was Green but Chesebrough Says It Wasn't 'Greenmail', 6 New Eng. Bus., Oct. 1, 1984,
at 42 (target denies greenmail); Mahon, Dealing with T. Boone Pickens, Barrons, June
18, 1984, at 13. (raider denies practicing greenmail); Disguised Forms, supra note 4 (tar-
get admits greenmail but as part of a repurchase agreement cannot give the names of the
sellers). Thus, the threat of greenmail can be actual or perceived. See The Greenmail
Blues, 97 L.A. Daily J., May 31, 1984, at 4, col. 1; Potts, 'Greenmail' Takeover Tactic
Under Scrutiny, 107 The Wash. Post, June 17, 1984, at G8, col. 1.
39. Thomas, Indecent Recklessness: 'Greenmail' A New Form of Old Cynicism, L.A.
Daily J., June 28, 1984, at 4, col. 3. See also Greenwald, Corporate Fear and Trembling,
TIME, Jan. 14, 1985, at 51.
40. See Disguised Forms, supra note 4, at 14.
19851
7
PACE LAW REVIEW
other shareholders in order to prevent the takeover"'
1
(this defi-
nition also places the onus on target management); 5) "the ac-
cumulation of a powerful block of stock by a buyer seeking only
to resell his shares back to the company at a premium over the
market price'
4
(this definition focuses on the raider's motive in
purchasing the shares, and views the raider as the wrongdoer
with an "improper" motive); 6) "legal corporate blackmail by
raiders who accumulate 10 to 25 percent of a company's stock
and then threaten a takeover or proxy fight if not bought out at
a premium"'
43
(this definition focuses on the percentage of stock
accumulated by the raider and clearly views the raider as the
wrongdoer); and 7) "[a] greenmailer is a relatively recent buyer
of a large block of a company's stock who says to management,
'Buy my shares at a premium or else' 44 (this definition places
the wrongdoing on the shoulders of the raider and emphasizes
the explicit nature of the threat).
A. What Constitutes A Greenmail Transaction?
There are a number of sound business reasons for a corpora-
tion to repurchase its own shares. Thus, it is often difficult to
distinguish greenmail from other beneficial corporate stock re-
purchases. Corporations often use stock repurchases to restruc-
ture the debt-equity ratio of the corporation,
5
increase the com-
pany's return-on-equity by investing in its own undervalued
stock, 4 and diminish the need to issue new stock to employees
41. See Unocal Corp. v. Mesa Petroleum Co., No. 152, 1985 (Del. Sup. Ct. May 17,
1985).
42. Wheat, There's a Fair Way to Protect Takeover Targets, L.A. Times, Jan. 13,
1985, at V, col. 1.
43. See supra note 3. See also Hearings, supra note 27, at 155 (statement of Martin
Lipton, a member of the SEC Advisory Committee on Tender Offers).
44. Siegel, How to Foil Greenmail, FORTUNE, Jan. 21, 1985, at 157.
45. One rationale for buybacks is that the corporation is acquiring cheap assets (i.e.
its own) since they are undervalued on the market. Another rationale is to make the
balance sheet more attractive and enhance earnings per share by reducing the number of
shares outstanding. See generally Why Geico is Acquiring More of Itself, Bus. WK.,
Sept. 12, 1983, at 45; Marcial, What Could Keep a Lid on Teledyne, Bus. WK., Oct. 29,
1984, at 92; Marcial, Buybacks in the Oil Patch Don't Persuade the Pros, Bus. WK., June
4, 1984, at 118.
46. Bianco, Look Who's Buying the Battered Brokerage Stocks, Bus. WK., Mar. 12,
1984, at 116.
[Vol. 6:69
GREENMAIL
exercising stock options.
47
Stock repurchases, either in the form
of open-market purchases or self-tenders,
48
are often made in re-
sponse to a hostile takeover as a means to reduce the number of
outstanding voting securities and consolidate voting power.
9
All
of these corporate stock repurchases are beneficial to the corpo-
ration. Greenmail is distinguishable from other stock repur-
chases only in that it is paid to a raider, as opposed to other
shareholders, at an above-market premium. Greenmail is argua-
bly beneficial to the target corporation because it protects the
company from a threatened takeover.
50
However, this protection
is achieved only at great expense to the target company.
51
Greenmail is also difficult to isolate as a transaction because
it need not be accomplished in cash, as the name suggests.
Greenmail may occur in a variety of disguised forms such as the
sale of a key asset to a raider at a bargain price,
52
purchase of an
unprofitable corporate division by a target at an exorbitant
price,
53
corporate repurchase programs which include privately
47. Id.
49. The SEC Advisory Committee on Tender Offers has sharply distinguished the
beneficial value of self-tenders from that of greenmail payments. The Committee report
said "[i]n view of the legitimate business" purposes that can be served by a self-tender,
the Committee believes that regulation of the mechanism generally should be governed
by the business judgment rule and, if abused, principles of fiduciary duty under state
law." SEC ADVISORY COMMITTEE ON TENDER OFFERS REPORT OF RECOMMENDATIONS, FED.
SEC. L. REP. (CCH) 1 1028, July 15, 1983, at 41. However, in the same report, the Com-
mittee said of greenmail, "[njot only does such a transaction generally serve little busi-
ness purpose outside the takeover context but also it constitutes a practice whereby a
control premium may be distributed selectively but not shared equally by all sharehold-
ers." Id. at 46.
50. Greenmail payments made by target management to "reduce the threat of losing
control of the firm through a tender offer or proxy fight," SEC STUDY ON THE IMPACT OF
GREENMAIL, supra note 2, at 1, are arguably beneficial when the raider has a dubious
reputation for poor managerial ability or is known as a "bust up artist" who would sell
off corporate assets to finance the takeover. See supra note 13 and accompanying text.
52. See Disguised Forms, supra note 4. The management of Morton Thiokol, Inc.
agreed to sell its most profitable division, Textize, to Dow Chemical Co. within a short
time after Dow's announcement of its plan to increase its holdings in Morton from 8.2 to
15 percent, albeit for "investment purposes only." In return, Morton received $131 mil-
lion in cash, a standstill agreement, whereby Dow agreed not to purchase any of Mor-
ton's stock for 10 years, and 1.4 million shares of Morton's stock. Id.
53. Carl Icahn, known for his hostile takeover attempts and greenmail tactics, "a
renowned master of the takeover game" according to the court in Trans World Airlines,
Inc. v. Icahn, No. 85 Civ. 3677 (JMC) (S.D.N.Y. May 28, 1985), acquired ACF Industries
1985]
9
negotiated buybacks,
6 4
and stock repurchases by major share-
holders in the target corporation.
55
Aside from the difficulties in isolating the greenmail trans-
action from other beneficial stock repurchases, greenmail is
often confused with blackmail. The term greenmail evokes an
image of blackmail accomplished with green cash.
56
This is mis-
leading because greenmail is not technically a form of blackmail.
Blackmail exists where there is an unlawful demand of money or
property coupled with a threat to damage property, cause bodily
injury, falsely accuse of a crime or expose to public shame and
humiliation.
7
Under current federal, state and common law, a
raider is permitted to "threaten" a target corporation with a
hostile takeover, tender offer or proxy fight.
5
By the same to-
ken, the target is permitted to pay the raider an above-market
premium for the repurchase of its shares in response to such a
"threat."
59
Thus, greenmail does not constitute the requisite
"unlawful
demand,"
60
and at present is considered
a legal
in a takeover and was interested in selling off its unprofitable plastics division, Polymer
Corp. Icahn soon acquired a five percent stake in Chesebrough-Ponds, Inc. In a buyback
agreement with Icahn, Chesebrough agreed to purchase his stake at market price and
acquire Polymer for $95 million. Prior to these negotiations, Chesebrough had indicated
to newspaper reporters that it had no intention of making any corporate acquisitions.
See Disguised Forms, supra note 4.
54. Pioneer Corp. repurchased 4.6 million of its shares in 1984. However, 2.6 million
shares were repurchased in "privately negotiated transactions" at $32 per share, which
constituted a $7 premium over the prevailing market price. See Disguised Forms, supra
note 4.
55. Irwin Jacobs, who was labeled a "raider" by the court in Minstar Acquiring
Corp. v. AMF Inc., No. 85 Civ. 3800 (MJL) (S.D.N.Y. June 7, 1985), launched a takeover
attempt of Walt Disney Productions, Inc. Unable to convince Disney's stockholders to
sell their shares, Jacobs accepted a buyout of his 7.7% stake in the company at a pre-
mium of $1.75 per share by the Bass brothers (also known for their greenmail tactics,
See Leading Deals and Deal Makers in the First Half of This Year, supra note 19). The
Bass brothers gained 24.3% of Disney, qualifying them as "insiders" under section 16(b)
of the Securities and Exchange Act of 1934. Even though they were not representatives
of the company, the effect was the same as if Disney had been greenmailed, with the
stock falling $4.12 per share on the day of the buyback. See Disguised Forms, supra note
4. See also Scheibla, A Mickey for Greenmail? The Disney Affair Spurs Congress to
Action, Barron's, June 18, 1984, at 8; A Price too High?, Fin. World, Aug. 22 - Sept. 4,
1984, at 8.
56. See supra note 34 and accompanying text.
57. BLACK'S LAW DIcTIoNARY 89 (5th ed. 1983).
58. See infra notes 104-114 and accompanying text.
59. Id.
60. See Pauly, A Row Over 'Greenmail', NEWSWEEK, Apr. 30, 1984, at 66. "Payment
GREENMAIL
transaction.
1
B. Who is the Wrongdoer: Greenmailer or Greenmailee?
As the preceding definitions of greenmail indicate, signifi-
cant controversy has centered upon the question of who commits
the wrongdoing from a policy standpoint. Both raiders and
targets have been accused of engaging in the practice of green-
mail for purely selfish reasons. Raiders are accused of purchas-
ing large blocks of corporate stock and threatening a takeover
for the sole purpose of forcing the target to buy back its stock at
highly inflated prices.
6 2
On the other hand, target management
is often accused of paying greenmail to preserve their jobs at all
costs and without regard for the welfare of the shareholders or
the corporation, for whom the directors are bound by law to act
as fiduciaries.
83
The problem of identifying the wrongdoer is also found re-
flected in the divergent views regarding the nature of the green-
mail threat. The definitions of greenmail, supra, indicate a dif-
ference of opinion as to whether the greenmail threat need be
explicit or merely implicit by the purchase of a substantial block
of stock. Similarly, when there is an actual threat of a takeover
and a payment ultimatum, the raider appears more readily as
the culprit. However, when the threat is implicit through the
raider's purchase of stock, many critics and raiders have con-
of greenmail is perfectly legal, but a growing legion of brokers, analysts, investors and
lawyers assert that it's simply unfair for one stockholder to be offered a big price for his
shares when the same opportunity is denied the rest." Id. See also Potts, 'Greenmail'
Takeover Tactic Under Scrutiny, The Wash. Post, June 17, 1984, at G8, col. 1.
61. In Britain, however, greenmail is prohibited since shareholder approval is re-
quired for nearly all defensive tactics. See Simon, Needed: a "generic remedy," FoRsEs,
Nov. 5, 1985, at 40.
62. See Rock, 'Greenmail: The Destabilizing of the American Corporation, 8 DREC-
TORS & BOARDS, Summer 1984, at 3 (supporting target management and criticizing the
"bullying power" of the raider).
63. See Easterbrook and Fischel, Corporate Control Transactions, 91 YALE L.J. 698
(1982).
Corporate directors and other managers are said to be fiduciaries, who must be-
have in certain upright ways toward the beneficiaries of fiduciary duties. Yet, as
Justice Frankfurter put it, "to say that a man is a fiduciary only begins analysis; it
gives direction to further inquiry. To whom is he a fiduciary? What obligations
does he owe as a fiduciary?"
Id. at 700.
1985]
11
PACE LAW REVIEW
tended that management's decision to make a repurchase offer is
merely a way to manipulate and stymie any corporate chal-
lenge.
4
Raiders often argue that they make large stock
purchases for investment only or to effectuate changes in the
corporate organizational structure.
6 5
Thus, due to the elusive na-
ture of the greenmail threat, the line between a payment de-
mand by the raider and a repurchase offer by the target becomes
very blurred, making it difficult to determine who initiated the
greenmail payment.
Ultimately, the issue of who has committed the wrongdoing
may become one of economic policy. Generally, those who favor
the free market system argue that the raider has only acted in
the best interests of all the shareholders by bidding up the value
of the undervalued stock and attempting to revitalize the corpo-
rate structure.
6
On the other hand, those favoring government
regulation of greenmail argue that target management should
not be thrust into the uncomfortable if not impossible situation
of having to decide whether or not greenmail should be paid to
protect the best interests of the corporation.
6 7
Indeed, it has
64. See Crittenden, The Age of 'Me-First' Management, N.Y. Times, Aug. 19, 1984,
at B1, col. 2 (this interview with Carl Icahn provides a raider's perspective on greenmail);
Dremen, Robin Hood Steinberg, FoRBES, Jan. 14, 1985, at 298 (favoring raider tactics as
an impetus for entrenched management to engage in beneficial restructuring of corporate
policies); see also Hearings, supra note 27 (testimony of Carl Icahn arguing in favor of
the raider not as a "bad guy" but as an activist for better management and corporate
democracy, Id. at 183), (testimony of Irwin Jacobs arguing in favor of the "outside inves-
tor" who buys a large stake in a company he believes is undervalued on the market, who
acts to stimulate management so the value can be increased by a variety of techniques
such as streamlining the operation through sale of assets, merger, or shutting down facili-
ties, and who ultimately increases the value of the stock by creating a tender offer pre-
mium or stronger company for the benefit of all shareholders, Id. at 467).
65. By accumulating large blocks of stock, the raider becomes sufficiently powerful
as a stockholder to influence corporate policy, directly or indirectly, through the board of
directors. As such, the raider is often able to cause streamlined corporate policies to be
implemented, and non-productive divisions to be sold or made more efficient.
67. See Hearings, supra note 27 (opening statement during testimony by Rep.
Timothy Wirth (D-Colo.) made on May 23, 1984):
(tihere is a balance of issues here that we have to come to understand. And I
think our special concern has been the protection of the shareholders, making sure
that in the process of takeovers, management does not act merely in its own self
interest, but acts to safeguard the interests of millions of American shareholders.
If shareholders believe that their interests are not being taken care of, clearly they
are going to be less willing to invest in the market.
[Vol. 6:69
GREENMAIL
been said that greenmail must be paid if target management is
to discharge its fiduciary duty to the corporation's
shareholders."
Recent Congressional subcommittee hearings
69
on tender of-
fer reform have indicated that legislators may prefer to regulate
hostile takeover offensive and defensive tactics in a manner
which will promote optimal industrial productivity and capital
formation.
0
Thus, proposed legislation has been structured to
promote economic efficiency, rather than to "punish" the per-
ceived wrongdoer in the greenmail transaction.
III. Should Greenmail be Regulated?
The question of whether greenmail should be regulated
turns on three major issues. First, the greenmail transaction
must be shown to cause actual harm to corporate or shareholder
interests. Second, as discussed in Part II, the greenmail transac-
tion must be sufficiently isolated from other beneficial stock re-
purchases. Finally, greenmail legislation need only be considered
if existing legal and commercial mechanisms are inadequate to
resolve the perceived problems. This section examines these
questions and concludes that there is a need for regulation of
greenmail.
Id. at 201.
68. See Note, supra note 32.
Management's use of corporate funds to purchase stock held by potential insur-
gents may protect the corporation from being taken over by less competent or
perhaps unscrupulous management, but the power to make such purchases is also
an effective device which the incumbent management may use to insulate its posi-
tion against shareholder action.
Id. at 308.
69. Two days of hearings on tender offer reform were held on March 28 and May 23,
1984. See Hearings, supra note 27.
70. In a written statement submitted to the House Subcommittee on Telecommuni-
cations, Consumer Protection and Finance, Rep. Timothy Wirth (D-Colo.) stated:
"[w]hen we as a nation are worried about capital formation - and when we are con-
cerned about productivity and international competitiveness - we must consider these
consequences of takeovers." See Hearings, supra note 27, at 206.
Rep. Wirth has received support in his position from the Committee on Energy and
Commerce in its report accompanying H.R. 5693 (see HousE REPORT, supra note 7, at 5-
6). The report stated: "[h]owever, when a 'hostile' tender offer is the means employed to
effect a business combination, the basic question of fairness - to shareholders, employees,
pension fund recipients, management and the affected communities - also comes into
play."
1985]
13
PACE LAW REVIEW
A. Actual Harm to Shareholder Interests
Although there has been little controversy as to the innate
unfairness of greenmail, there has been disagreement as to the
actual resulting harm to shareholder wealth.
7
A recent study of
the Office of the Chief Economist of the Securities and Ex-
change Commission (SEC) found that the value of greenmailed
companies declined after the announcement of the buyback.
7 2
The study of eighty-nine targeted share repurchases (i.e., green-
mail payments) of New York Stock Exchange (NYSE) or Ameri-
can Stock Exchange (ASE) companies from 1979 to 1983, found
that the announcement of the greenmail payment caused stock
prices to decline and more than offset the initial appreciation of
the stock from the announcement of the hostile takeover bid.
7 3
Subsequent to the greenmail transaction, the net overall stock
price decline was "roughly equal to the magnitude of the cash
premium paid to the block seller.
'
"
74
When the greenmail pay-
ment was preceded by a proxy contest or tender offer, there was
an even greater decline in stock prices.
5
Other studies conclude that there may not be a long term
decline in stock prices after a greenmail payment is made. Three
recent unpublished studies by Mikkelson and Ruback
6
found
that the initial appreciation of the stock more than offset the
71. See infra notes 75-79 and accompanying text.
73. Id. at 15-16.
74. Id.
75. Id. at 11-12. Informal studies and compilations of stock prices before and after
greenmail payment announcements also tend to confirm the SEC's findings of an overall
net loss to shareholder wealth. See Sonenclar, supra note 9, at 17.
Rumors of a pending merger usually drive up the price of a target company's
stock several points. Confirmation of these rumors - or, even better, an actual
agreement - often lifts the price of the stock to within a few points of the dollar
amount of the proposed takeover offer. But if the deal collapses, the stock price
will often plummet, staying at or below the pre-offering price for several weeks or
longer.
Id.
See also Samuelson, A Misuse of Management Power, NEWSWEEK, June 25, 1984, at
56 (contains a table of greenmail transactions with stock fluctuations one week before,
during, and one week after the buyout, tending to confirm SEC findings).
76. Wayne H. Mikkelson of the College of Business Administration of the Univer-
sity of Oregon and Richard S. Ruback of the Sloan School of Management, Massachu-
setts Institute of Technology.
[Vol. 6:69
19851 GREENMAIL
decline after the announcement of the greenmail payment."'
Perhaps more importantly, the authors of the studies say that
their results indicate that it is impossible to determine, simply
by observing stock price effects, whether the drop in stock value
subsequent to the greenmail announcement was precipitated by
the greenmail payment or the unfavorable information that it
brings with it, i.e. that there will be no takeover.
7
77. Mikkelson and Ruback, Targeted Repurchases and Common Stock Returns
(Oct. 1984) (unpublished manuscript); Mikkelson and Ruback, Corporate Investments in
Common Stock (Nov. 1984) (unpublished manuscript) (this study, which was based upon
the valuation effects of corporate investments of five percent or more, compared the
profitability of target and raider under several possible outcomes including a completed
takeover, a targeted repurchase (i.e. greenmail), a takeover by a third party and a sale of
the purchased shares. When the outcome was greenmail, the study found that the posi-
tive return at the initial announcement of the raider's investment position more than
offset the negative return at the outcome announcement (that greenmail was paid));
Mikkelson and Ruback, Corporate Investments in Common Stock, (Feb. 1985) (unpub-
lished manuscript) (the results of this study concur with the previous two, and found
that "[t]arget firms on average incur a significant loss of -2.29% in the two-day an-
nouncement period of a targeted repurchase." Acquiring firms, on the other hand, expe-
rience average abnormal returns of 2.13% at the announcement of the greenmail pay-
ment. Id. at 27). (Manuscript on File at Pace Law Review office).
78. In their study, Targeted Repurchase and Common Stock Returns, supra note
77, Mikkelson and Ruback state that:
[olverall, our evidence raises the burden of proof for those who argue that
targeted repurchases harm the repurchasing firm's shareholders. The argument
that a targeted repurchase harms shareholders requires evidence that the targeted
repurchase was dominated by an alternative course of action. Evidence of only
price effects cannot determine whether repurchases are in stockholders' interests.
In other words, we cannot resolve whether targeted repurchases cause the ob-
served decrease in shareholders' wealth or whether the targeted repurchases con-
vey unfavorable information which motivated the decisions to repurchase shares.
Id. at 3.
An analysis of targeted repurchases conducted by Kidder, Peabody & Co. and
presented to the House Subcommittee on Telecommunications, Consumer Protection
and Finance, Hearings, supra note 27, at 446-66, also tends to confirm the findings of
Mikkelson and Ruback. This study, based on 220 buybacks from January, 1979 to De-
cember, 1983, found that "the stock price movement of companies who have repurchased
a block of their securities since 1979 shows that in approximately 70% of the cases, the
current market price is in excess of the premium purchase price paid to the accumula-
tors." Id. at 447.
Honorable Arthur J. Goldberg, former Supreme Court Justice and a member of the
SEC Advisory Committee on Tender Offers, has also expressed dissatisfaction with the
stock price indicator and its mysterious influences. He stated:
[n]o evidence was presented to the Advisory Committee and no authoritative
study seems to have been made as to whether, in the long run, tender offers have
contributed to corporate viability or profitability or have benefitted shareholders
of the offeror or target company or the public. Instead, attention has been focused
15
Aside from the arguable loss to shareholder wealth from
stock market declines, the payment of greenmail inflicts other
hardships on shareholders. Greenmail is often used as a means
by which the target management can prevent a proxy contest or
tender offer from materializing.
79
This circumvents the purpose
of the tender offer mechanism, which permits the bidder to ap-
peal directly to the shareholders, since under many state corpo-
ration laws shareholder approval of a merger can only be made
subsequent to approval by the board of directors.
8 0
When target
management is able to bypass the tender offer mechanism,
shareholders are deprived of the tender offer for their stock
(usually at prices above the market value) and the rising value
of their stock based upon market speculation of a takeover."
s
In
on stock prices which are based primarily on market perceptions at the time of the
tender offer. Moreover, the market is influenced by many factors, some of which
relate to stock values and others to the general economy, inflation, interest rates
and the like.
Hon. Goldberg, Regulation of Hostile Tender Offers: A Dissenting View and Recom-
mended Reforms, 43 MD. L. REV. 225, 228 (1984).
79. Gilson, A Structural Approach to Corporations: The Case Against Defensive
Tactics in Tender Offers, 33 STAN. L. REV. 819 (1981). "Major forms of defensive tactics
achieve success not because they convince target shareholders to retain their shares, but
because they prevent the offer from being made, or if made, consummated, and thereby
ensure that shareholders cannot make, from management's perspective, the 'wrong' deci-
sion." Id. at 819.
See also Prentice, Target Board Abuse of Defensive Tactics: Can Federal Law be
Mobilized to Overcome the Business Judgment Rule? 8 J. CORP. LAW 337, 344 (1983).
80. For a discussion of the historical background and changes in shareholder ap-
proval of corporate mergers, see generally Scriggins and Clarke, Takeovers and the 1983
Maryland Fair Price Legislation, 43 MD. L. REV. 266, 267 (1984).
See also Lipton, Takeover Bids in the Target's Boardroom 35 Bus. LAw. 101 (1979).
[w]here the only issue in a tender offer is price, our present legal structure per-
mits a raider, after compliance with the applicable federal and state laws, to short-
circuit acceptance by the directors of the target and to make its offer directly to
the shareholders of the target. The shareholders then have the power, indepen-
dent of the directors, to determine whether or not to accept the offer.
Id. at 116.
81. The expectation that a tender offer will occur tends to drive up the price of the
stock. This expectation is often triggered when a raider files a Schedule 13D with the
SEC indicating an "initial foothold acquisition" in the target company. According to the
SEC STUDY ON THE IMPACT OF GREENMAIL, supra note 2:
[t]he average net-of-market stock return for the 89 cases during the initial foot-
hold acquisition is 9.7%. This is measured from twenty trading days before to five
trading days after public announcement of the acquisition. This large, positive
return reflects widespread expectations that the acquisition of these stock blocks
will confer substantial future benefits to shareholders. The specific sources of
1985] GREENMAIL
addition, the target management is able to retain control over
the corporation, preserve their positions by eliminating the take-
over threat, and thus deny shareholders the opportunity to vote
a change
in management.
8 2
Thus, there seems to be sufficient evidence that greenmail
payments tend to stifle tender offers and proxy contests which
are potentially beneficial to the shareholders. Moreover, despite
some conflicting evidence, there are indications that the pay-
ment of greenmail actually causes stock values to decline.
B. Existing Legal and Commercial Mechanisms
Regulation of greenmail need only be considered if existing
legal and commercial mechanisms are incapable of protecting
shareholder and corporate interests. Currently, there are no ade-
quate safeguards in the marketplace, common law, or federal or
state law. Greenmail is neither prohibited nor discouraged, as
evidenced by the increase in the size and number of greenmail
payments in recent years.
83
1. Market Self-Regulation
The failure of the market to develop a way to protect target
companies from the threat of greenmail is evidenced by the
these benefits have been the subject of much research. They include takeovers,
proxy fights, and closer monitoring that can cause various improvements in the
utilization of the target's assets.
Id. at 7.
The results of the Mikkelson and Ruback study, Corporate Investments in Common
Stock, (Nov. 1984) (unpublished manuscript), tend to confirm this evidence of share-
holder optimism.
A successful takeover is the least profitable outcome for acquiring firms and
the most profitable outcome for the target firms. When the final outcome is a
successful takeover attempt by a third party, the total return is positive for both
the acquiring firm and the target firm. The most profitable outcome for the ac-
quiring firm is either the sale of shares or a targeted repurchase. Target firms
realize a small, but statistically significant, positive abnormal return for invest-
ments that conclude with targeted repurchases.
Id. at 3.
82. Some legal scholars, such as Professor Ronald Gilson of Stanford University
School of Law, have suggested that the unhindered operation of the tender offer process
may be one of the most effective ways to "police" target management and keep them
accountable to their shareholders. See Gilson, supra note 79, at 848.
17
methods currently chosen by targets to insulate themselves from
greenmail and takeover threats. First, many companies opt to
pay greenmail with above-market premiums to the raider." This
practice has occurred with increasing frequency over the past
ten years
e
.
8
Second, many corporations have opted for "delist-
ing," or dropping from the list of stocks traded on the national
exchanges by "going private," in order to diminish the voting
power of the public shareholders.
8 6
This often involves a "lever-
aged buyout," whereby corporate assets serve as collateral for
loans used to finance the repurchase of a majority of the com-
pany's stock.
7
Third, corporations have implemented a wide va-
riety of defensive tactics known as "shark repellent" or "porcu-
pine" measures to fend off unwanted suitors.
88
These measures
include: changes in the corporate articles of incorporation, char-
ter or bylaws to prohibit corporate buybacks
89
or to provide for
84. According to the SEC STUDY ON THE IMPACT OF GREENMAIL, supra note 2, at 1,
from January, 1979 to September, 1984 target companies paid individual shareholders
(or certain groups of shareholders) more than $5.5 billion to repurchase blocks of their
stock.
86. See Wheat, supra note 42.
87. See Reiser, supra note 9, at 44. "LBO's have become increasingly popular as a
means of averting a hostile takeover bid. The procedure, which takes the company pri-
vate, gets its name from the fact that it involves a high level of debt in relation to eq-
uity." Id.
See generally Longstreth, New Controls for Leveraged Buyouts, N.Y. Times, Nov.
6, 1983, at F3, col. 1; Metz, How a Leveraged Buyout Works: A Look at Charterhouse's
Success, Wall St. J., Mar. 17, 1982, 2 at 29, col. 4.
88. Rosenzweig, The Legality of "Lock-Ups" and Other Responses of Directors to
Hostile Takeover Bids or Stock Aggregations, 10 SEC. REG. L.J. 291 (1983).
Another technique frequently employed by directors to deflect takeover bids has
been the use of defensive charter and bylaw provisions, otherwise known as "shark
repellent" or "porcupine" provisions. Although the increasing frequency with
which companies have enacted such provisions has moved the SEC's Division of
Corporate Finance to announce its position on the subject, their utility in accom-
plishing their intended purpose has been widely questioned.
Id. at 309.
Cf. BALDWIN, CONFLIcTING INTERESTS at 167-79 (1984); Gilson, The Case Against
Shark Repellent Amendments: Structural Limitations on the Enabling Concept, 34
STAN. L. REv. 775 (1982); Hudson, The Use of Shark Repellent Charter Provisions to
Forestall Hostile Takeover Bids, 62 MICH. BAR J., July 1983, at 522.
89. For example, Mead Corp. has had a provision in its bylaws for 50 years forbid-
ding stock repurchases at a premium unless it is part of a general tender offer.
Mobil Corp. recently called for an anti-greenmail amendment to its certificate of
incorporation in an apparent move to counteract a possible takeover by raider T. Boone
1985] GREENMAIL
staggered terms of office for directors; prohibiting so-called
"frontend loaded offers" by raiders;
9
requiring a supermajority
vote to approve takeover bids;
9 1
reincorporation in states such as
Delaware with laws favorable to corporate management; and
limiting voting power to closely held classes of stock.
92
These
methods chosen by target corporations to protect themselves are
illustrative of the defenseless position in which they find
themselves.
It should be briefly noted here, that according to a study
conducted by the Office of the Chief Economist of the SEC, en-
titled Shark Repellants: The Role and Impact of Antitakeover
Charter Amendments, there was an aggregate loss of $1.35 bil-
lion to the shareholders of the 127 NYSE, ASE and over the
counter (OTC) corporations studied as a result of the adoption
of the anti-takeover amendments.
3
The SEC report suggests
that the aggregate stock price declines support the conclusion
that these anti-takeover devices (primarily fair price and
supermajority provisions) are perceived by the market as devices
Pickens. See Mobil Proposes Protections 134 N.Y. Times, Jan. 12, 1985, at 21, col. 6. For
another example of a similar charter amendment, see Annual Meeting Briefs - Ralston
Purina Co., Wall St. J., Jan. 18, 1985, at 35, col. 2.
In its February 22, 1985 Notice of Annual Meeting of Stockholders, the NCR Corpo-
ration recommended shareholder approval of its anti-greenmail charter amendment that
would prohibit the company from repurchasing stock from an "interested shareholder"
at a premium over market price unless approved by a majority of the voting stockhold-
ers. Management justified the change for the following reasons:
[t]he Board feels that it is advisable to protect the Company's present stockhold-
ers from the possibility of unequal future treatment; by adopting the proposed
amendment, the Company's stockholders would send a clear communication to
corporate speculators that the Company is not vulnerable to the above-described
tactic. This tactic, commonly known as "greenmail", has been the subject of re-
cent litigation, legislative consideration and commentary by both business leaders
and legislators. There is currently no Federal or state law that prohibits the use of
this tactic. Therefore, the Board believes that action should be taken to minimize
the possibility of the tactic being used against the Company and against the inter-
ests of the stockholders as a whole.
NCR CORP., NOTICE OF ANNUAL MEETING OF STOCKHOLDERS, 14-15 (Feb. 22, 1985).
90. See Hearings, supra note 27, at 155 (statement of Martin Lipton).
91. "Supermajority" votes require a high percentage of the vote, such as 75-80%.
See Reiser, supra note 9, at 50.
92. Id.
93. See THE OFFICE OF THE CHIEF ECONOMIST, SECURITIES AND EXCHANGE COMMIS-
SION, SHARK REPELLENTS: THE ROLE AND IMPACT OF ANTITAKEOVER CHARTER AMENDMENTS
(Sept. 7, 1984).
19
PACE LAW REVIEW
to entrench management.
94
Thus, although the concept of a cor-
porate charter or bylaw amendment may appear more palatable
from the perspective of shareholder democracy and corporate
control,
95
it may also result in a significant loss to shareholder
wealth and serve to entrench management.
96
This author has been able to discover only two significant
collective initiatives to control the practice of greenmail in the
commercial sector. First, the Financial Accounting Standards
Board (FASB), a major rule-making body for accountants, is
considering a proposed accounting rule to categorize the green-
mail premium paid by target companies as an expense and
charge it against reported profits.
97
Currently, such premiums
are deducted from the treasury stock account on the balance
sheet and have not affected profits. The proposal is highly con-
troversial, and many of its critics believe that it will only sup-
press stock values of the target by lowering the profit margin.
98
The measure would thus permit the payment of greenmail as a
defensive maneuver, but would penalize the target once payment
was made.
99
A second initiative has emerged from the nationally-based
Council of Institutional Investors. This organization, comprised
94. Id. at 17.
95. Commentators have been wary of the degree of influence that target company
directors may have in the passage of such anti-takeover amendments to corporate char-
ters. See Rosenzweig, supra note 88. "It should be emphasized that, like most other
target responses to takeover bids, charter and bylaw amendments have been protected
by the presumption of validity that accompanies any exercise of directors' power." Id. at
310. See also McKee & Co. v. First Nat'l Bank, 265 F. Supp. 1, 4 (S.D. Cal. 1967), afl'd,
397 F.2d 248 (9th Cir. 1968).
The SEC ADVISORY COMMITrrE ON TENDER OFFERS REPORT OF RECOMMENDATIONS,
supra note 49, at 35, recommended that Congress should adopt legislation to prohibit
the use of charter and bylaw provisions that erect high barriers to change of control and
thus operate against the shareholders and the national market place. In making its final
recommendation to Congress, the SEC, while sharing the same concern as the Commit-
tee, disagreed with the Committee's recommendation on the grounds that it would con-
stitute too great an intrusion into state corporation law. See Hearings, supra note 27, at
35 (statement of Committee Recommendations and the Commission's Positions and
Contemplated Actions).
97. See Berton, FASB May Soon Weigh Rule Hampering Ability of Companies to
Pay Greenmail, Wall St. J., June 14, 1985, at 5, col. 1.
98. Id.
99. Id.
[Vol. 6:69
GREENMAIL
of several of the largest state and local pension funds, including
those from California, Connecticut, New Jersey, New York and
Wisconsin, has collective assets of more than $100 billion and
controls a substantial share of the securities market.'
00
The
Council plans to reevaluate the fiduciary role of pension fund
trustees in the context of corporate takeovers involving stock
held by the fund.
1
'
1
Former U.S. Labor Department administra-
tor of the Office of Pension and Welfare Benefit Programs, Rob-
ert Monks, had criticized institutional investors for supporting
target management in all defensive tactics - including green-
mail payments - rather than voting against the misuse of cor-
porate assets.
02
In the past, pension funds were badly injured
when stock values in target companies plummeted after green-
mail was paid, and fund portfolio values dropped as a result.
103
These two initiatives are still in developmental stages and
have not yet been implemented. Thus, regardless of their merits
in the long run, there are no existing prohibitions or disincen-
tives to curb the practice of greenmail except shark repellent
charter amendments which may result in a decline in share-
holder wealth.
2. Existing Federal Law
Current federal securities laws do not regulate or prohibit
the payment of greenmail. The Williams Act of 1968,104 which
amended the Securities Exchange Act of 1934,105 was enacted to
regulate cash tender offers through the use of disclosure require-
100. See Bleakley, A Trustee Takes on Greenmailers, N.Y. Times, Feb. 10, 1985, at
F6, col. 1; Pension Funds Agree to Organize to Fight 'Raiders' of Concerns, Wall St. J.,
Jan. 4, 1985, at 6, col. 5; see generally DeBenedictis, Pension Funds Plan for 'Greenmail'
Council, 97 L.A. Daily J., July 2, 1984, at 3, col. 1; Harris, Unruh Urges Fight Against
'Greenmail', L.A. Times, July 27, 1984, IV, at 1, col. 6; Smith, California Official Moves
to Organize Pension Funds to Combat Greenmail, Wall St. J., July 26, 1984, at 12, col 2.
102. See Red Light Flashed at Greenmail, Pa. L.J. Rep., July 16, 1984, at 1, col. 3;
see also The Pension Watchdog is No Longer a Pussycat, Bus. WK., Oct. 8, 1984, at 152.
103. See supra notes 100, 102.
104. 15 U.S.C.A. 781(i), 78m(d)-(e), 78n(d)-(f) (West 1981). The Williams Act is
the popular name of Pub. L. 90-439, 82 Stat. 454 (1968) which added 13(d), 13(e) and
14(d)-(f) to the Securities Exchange Act of 1934.
105. 15 U.S.C.A. 77(b)-(e), 770), 77(k), 77(m), 77(o), 77(s), 78(a)-(d), 78(e)-(k-1),
78(1), 78(m)-(o), 78(o-3), 78(o-4), 78(p)-(q-1), 78(r)-(dd-2), 77(e)-78(hh), 78(ii)-(jj notes),
78(kk) (West 1981).
19851
21
PACE LAW REVIEW
ments in response to the growing number of takeovers and
tender offers in the country.
10 6
The principal disclosure provi-
sions of the Act are contained in sections 13(d) and 14(d). Sec-
tion 13(d)
10 7
requires a purchaser of a security to file a Schedule
13D
0 s
with the SEC within ten days of the purchase if the
purchase exceeds five percent of the target's outstanding securi-
ties. Section 14(d)
10 9
requires a tender offeror to file similar in-
formation with the SEC to give shareholders in the target com-
pany a fair opportunity to make their investment decision.
110
The Williams Act also contains a number of substantive provi-
sions designed to protect shareholders who tender their shares in
response to a tender offer."'
The theme of the Williams Act is the protection of the in-
vestor by means of tender offer disclosure information. This
method, which has been labeled a "market approach," advocates
a non-interventionist means of supplying the investor with suffi-
cient information upon which to reasonably base an investment
decision.
2
The Act carefully preserves its regulatory impartial-
ity by mandating disclosure, in an effort not to "tip the balance"
106. See H.R. REP. No. 1711, 90th Cong., 2d Sess., reprinted in, 1968 U.S. CODE
CONG. & AD. NEWS 2811.
107. 15 U.S.C.A. 78m(d) (West 1981). See generally Comment, Section 13(d) and
Disclosure of Corporate Equity Ownership, 119 U. PA. L. REv. 853 (1971).
108. A Schedule 13D requires any person who becomes the beneficial owner of five
percent or more of a company's outstanding securities to file certain information within
10 days of the purchase, including information about whether a "control purpose" is
contemplated. See Annot., 57 A.L.R. FED. 806 (1982).
109. 15 U.S.C.A. 78n(d) (West 1981).
110. Id. See generally MITE Corp. v. Dixon, 633 F.2d 486 (7th Cir. 1980), aff'd sub
nom, Edgar v. MITE Corp., 457 U.S. 624 (1982).
111. MITE, 633 F.2d at 492.
112. Id. See also Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975) ("the
purpose of the Williams Act is to insure that public shareholders who are confronted by
a cash tender offer for their stock will not be required to respond without adequate in-
formation .... ) Sen. Williams (D-N.J.), the sponsor of the Williams Act, reiterated the
disclosure purpose of the legislation in the Senate debate:
[tioday, the public shareholder in deciding whether to accept or reject a tender
offer possesses limited information. No matter what he does, he acts without ade-
quate knowledge to enable him to decide rationally what is the best course of
action. This is precisely the dilemma which our securities laws are designed to
prevent.
113 CONG. REc. 24,664 (1967) (Remarks of Sen. Williams, quoted in, Schreiber v. Bur-
lington Northern, Inc., 105 S. Ct. 2458, 2463 (1985)).
[Vol. 6:69
GREENMAIL
in favor of the raider or target.
113
The Williams Act does not address the issue of greenmail.
However, the House Report accompanying the Act acknowl-
edged the growing importance of corporate buybacks by the is-
suer as a means by which to consolidate voting power and frus-
trate tender offers."
4
No specific legislative guidelines were
established to regulate corporate buybacks, but the SEC was
given a mandate to adopt regulations requiring appropriate dis-
closures when corporations repurchase their own securities, pur-
suant to section 13(e).1
1 5
Under this rule-making authority, the
SEC has promulgated three regulations concerning stock
buybacks by issuing companies. Rule 13e-111 requires an infor-
mational filing by the issuer when a bidder has made a tender
offer and the issuer thereafter intends to purchase its own secur-
ities. Information such as the names of persons from whom the
securities are to be purchased, the purpose of the buyback, and
the source of the funding, must be included in the filing."1
7
Rule 13e-311
8
requires the disclosure of certain information
by the issuer when a stock repurchase by the issuer would cause
the corporation to "go private," i.e., the stock of a section 12(g)
or section 15(d) issuer"' would be held by less than 300 persons
or the corporation would be "delisted" on a national securities
exchange.
20
Rule 13e-41
2
' requires informational disclosures by
the issuer when the issuer makes a formal tender offer under
section 13(e) for its own stock.'
2 2
113. See 1968 U.S. CODE CONG. & AD. NEWS, supra note 106, at 2813.
114. Id. at 2814.
115. 15 U.S.C.A. 78m(e)(1) (West 1981).
116. 17 C.F.R. 240.13e-1 (1985).
117. Id.
118. 17 C.F.R. 240.13e-3 (1985).
119. A section 12(g) issuer has total assets exceeding $1,000,000 and a class of non-
exempt equity security held of record under section 12(g)(1)(A) by 750 or more persons,
or under section 12(g)(1)(B) by more than 500 but less than 750 persons. 15 U.S.C.A.
781(g)(1) (West 1981). See 17 C.F.R. 240.12g-1 (1985) for additional exemptions.
A 15(d) issuer includes all issuers who must file periodic or supplementary informa-
tion pursuant to section 78m regarding securities registered under section 781, except
securities issued by a foreign government or political subdivision. 15 U.S.C.A. 78o
(West 1981).
120. 17 C.F.R. 240.13e-3 (1985).
121. 17 C.F.R. 240.13e-4 (1985).
122. Such a situation is commonly referred to as a self-tender offer and is governed
1985]
23
PACE LAW REVIEW
The payment of greenmail tends to elude the three situa-
tions covered by the SEC rules. For example, in the first situa-
tion under Rule 13e-1, greenmail is often paid to prevent a
tender offer, not subsequent to one.
123
In the second situation,
under Rule 13e-3, greenmail payments do not generally cause a
company to be delisted or go private.
124
Most greenmailers hold
a stake which accounts for less than twenty-five percent of a
company's outstanding securities, so the danger of causing a
company to go private is minimal.
25
In the third situation,
under Rule 13e-4, although greenmail may sometimes be dis-
guised under the larger umbrella of a self-tender by the issuer,
126
it is more often than not accomplished through private negotia-
tion with the raider thereby enabling the company to circum-
vent the requirement
of a self-tender
and Rule 13e-4.1
27
In sum, the Williams Act does not prohibit the practice of
greenmail, and the regulations promulgated by the SEC to mon-
itor issuer buybacks are not sufficiently sensitive to result in the
disclosure of greenmail transactions.
3. Existing State Law
Corporate stock repurchases or buybacks are regulated by
two types of state laws: corporation
law and takeover law.
28
However, the states, like the federal government, have declined
by the general tender offer rules and regulations of the act. Id.
124. Cf. notes 19, 42, 87 and accompanying text. The author knows of no formal
study as to how often the payment of greenmail has caused companies to go private.
125. In support of this position is the fact that none of the largest leveraged buyouts
in the first half of 1984 involved the same companies of the largest greenmail transac-
tions. See Leading Deals and Deal Makers in the First Half of This Year, N.Y. Times,
July 3, 1984, at D6, col. 1. Moreover, of the seven largest greenmail payments in the first
half of 1984, the average stake held was 9.1%. Id. Under the Kidder, Peabody & Co.
study, see Hearings supra note 27, at 446-66, if one averages out the amount of stock
repurchased in each of the 220 cases, the average stake amounts to 12.7%.
128. In its recommendations to Congress regarding tender offer legislation, the SEC
stated that state takeover law should be confined to local companies, so as not to conflict
with federal takeover law. The SEC also suggested that federal takeover law should not
interfere with state corporation law, except to the extent necessary to eliminate abuses
or interference with the federal law. See Hearings, supra note 27, at 22 (Committee
Recommendations and the Commission's Positions and Contemplated Actions).
[Vol. 6:69
1985] GREENMAIL
to regulate the practice of greenmail.
State corporation laws have traditionally regulated the rela-
tionship between shareholders and corporate management.
129
No
state prohibits a corporation from purchasing its own shares.
130
Most state statutes contain some minimal restrictions on the
power of a corporation to repurchase its own shares.
131
The ma-
jority of states authorize such a purchase by the issuer as long as
the corporation is solvent and the buyback would not create in-
solvency.
132
Many states mandate that there be no resultant
"impairment of capital.'
3 3
Several states permit a stock repur-
chase only if it is paid from the corporation's "earned surplus"
or "paid-in surplus." The definition of these terms vary from
state to state.'
34
Other states have added further restrictions on
129. Cort v. Ash, 422 U.S. 66 (1975). "Corporations are creatures of state law, and
investors commit their funds to corporate directors on the understanding that, except
where federal law expressly requires certain responsibilities of directors with respect to
stockholders, state law will govern the internal affairs of the corporation." Id. at 84.
130. See Note, supra note 32, at 320 app. A. See generally Israels, Limitations on
the Corporate Purchase of its Own Shares, 22 Sw. L.J. 755 (1968).
131. See, e.g., CAL. CoR'. CODE 510 (West 1977); MINN. STAT. ANN. 302A.553
(West 1985); see infra notes 132-135 and accompanying text.
132. See, e.g., ALASKA STAT. 10.05.210 (1985); COLO. REV. STAT. 7-3-102(4) (1973);
FLA. STAT. ANN. 607.017 (West 1977); HAWAII REV. STAT. 416-28(3) (1976); IND. CODE
23-1-2-3 (1984); KAN. STAT. ANN. 17-6603(d) (1981); LA. REV. STAT. ANN. 12:55(A)
(West 1969); MICH. Comp. LAWS ANN. 450.1365(2)(b) (1973); MIss. CODE ANN. 79-3-
131 (1973); Mo. ANN. STAT. 351-200(1) (Vernon Supp. 1985); N.J. STAT. ANN. 14A:7-
16(5)(b) (West 1969); N.C. GEN. STAT. 55-52(e)(2) (1982); N.D. CENT. CODE 10-19-
05(1) (1976); OHIO REV. CODE ANN. 1701.35(B) (Page Supp. 1984); S.C. CODE ANN. 33-
9-180(e) (Law. Co-op. Supp. 1981); VA. CODE 13.1-40 (1978); W. VA. CODE 31-1-112
(1982). In re Brown's Estate, 130 Ill. App. 2d 514, 264 N.E.2d 287 (1970); Cate v. Pagel-
Clikeman Co., 87 Ill. App. 2d 65, 230 N.E.2d 387 (1967); 13 ILL. LAW & PRAC. CORPORA-
TIONS 375, at 525 (1955). See also ILL. ANN. STAT. ch. 32, 9.05 (Smith-Hurd 1984),
while not explicitly mandating corporate solvency it has been interpreted by the courts
as requiring such.
133. See, e.g., DEL . CODE ANN. tit. 8, 160(1) (1983) (interpreted in In re Reliable
Mfg. Corp., 703 F.2d 996 (7th Cir. 1983) as prohibiting a corporation from purchasing its
own stock when the purchase would impair its capital as of the date the price must be
paid); KAN. STAT. ANN. 17.6603(d) (1981); Mo. ANN. STAT. 351.200(1) (Vernon Supp.
1985); W. VA. CODE 31-1-116 (1982) (in Mountain State Steel Foundries, Inc. v. Com-
missioner, 284 F.2d 737 (4th Cir. 1960), the court construed the term "impairment of
capital" to mean the depletion of realizable value of assets to a point below total liabili-
ties and capital); see also Note, supra note 32, at 320.
134. See, e.g., ALASKA STAT. 10.05.012 (1985); CAL. CORP. CODE 1707(c) (West
1985) (see In re Belmetals Mfg. Co., 299 F. Supp. 1290 (N.D. Cal. 1969), aff'd sub nom.,
Eranosian v. England, 437 F.2d 1355 (9th Cir. 1971) purchases by corporations must be
from "earned surplus"); COLO. REV. STAT. 7-3-102(1) (1974); FLA. STAT. ANN.
25
PACE LAW REVIEW
the corporation's ability to repurchase its own shares.
135
In the
states without legal capital statutes, common law generally au-
thorizes stock repurchases by the issuing corporation.
3
' How-
ever, the common law is silent on the subject in two states.
37
Thus, under the state corporation laws, target corporations
are permitted to repurchase their own stock subject only to cer-
tain balance sheet considerations of the legal capital statutes.
3 8
Under these laws, the only time a greenmail payment might be
considered illegal would be if it caused the corporation to be-
come insolvent, was not paid from the requisite "surplus," or vi-
olated the statute in some other way.
139
State takeover legislation has also been ineffective in regu-
lating the practice of greenmail. State takeover legislation gener-
ally governs the relationship between the bidder and the target
corporation during tender offers."
0
Takeover legislation can be
grouped into three major categories. The Maryland approach"'
imposes fair price requirements on potential acquirers."
2
The
607.017(2) (West 1977); HAWAn REV. STAT. 416-28 (1976) (permits purchase from paid-
in surplus and surplus created by a reduction in capital stock); IND. CODE 23-1-2-3
(1984); MICH. CoMp. LAWS ANN. 450.1365 (1973) (see Davis v. Brydges, 122 Mich. App.
768, 333 N.W.2d 127 (1983) construing the meaning of "surplus"); N.H. REV. STAT. ANN.
294:28 (1966); N.Y. Bus. CORP. LAW 513 (McKinney 1963) (see In re Dawson Bros.
Constr. Co., 218 F. Supp. 411 (N.D.N.Y. 1963) prohibiting corporate purchase of its own
stock except from "surplus"); N.C. GEN. STAT. 55-52(c) (1982) (certain purchases must
be made out of "surplus"); N.D. CENT. CODE 10-19-05(2) (1976); S.C. CODE ANN. 33-9-
180(b) (Law. Co-op. Supp. 1981); VA. CODE 13.1-4 (1978).
135. See, e.g., GA. CODE ANN. 14-2-94 (1982); HAWAI REV. STAT. 416-28 (1976);
ILL. ANN. STAT. ch. 32, 9.05 (Smith-Hurd 1984); KAN. STAT. ANN. 17.6603 (1981); MD.
CoRPs. & Ass'NS CODE ANN. 2-310 (1985).
136. In states without statutory restrictions on corporate buybacks, such purchases
are permitted under common law if made in good faith and without prejudice to credi-
tors. Americanized Finance Corp. v. Yarbrough, 223 Ala. 266, 135 So. 448 (1931); Copper
Belle Mining Co. v. Costello, 11 Ariz. 334, 95 P. 94 (1908); Bates Street Shirt Co. v.
Waite, 130 Me. 352, 156 A. 293 (1931); Winchell v. Plywood Corp., 324 Mass. 171, 85
N.E.2d 313 (1949).
137. There is no relevent statutory or case law in Idaho and New Mexico.
138. See supra notes 132-137 and accompanying text.
139. Id.
140. See HousE REPORT, supra note 7, at 13.
141. This approach has also been adopted by Connecticut, Kentucky and Michigan.
See Lewin, infra note 142.
142. See Lewin, Business and the Law: State Controls On Takeovers, N.Y. Times,
Nov. 27, 1984, at D2, col. 1. For an excellent synopsis of the recent history of state take-
over statutes see Hearings, supra note 27, at 289 (statement of Morgan Shipman for the
Ohio Manufacturers' Association, and accompanying app. B).
[Vol. 6:69
GREENMAIL
Ohio model1
43
requires that shareholders be allowed to vote on
any transaction that would give an acquirer a controlling stake
in a company."' The Pennsylvania approach, which is the least
favorable to bidders, mandates that any holder of thirty percent
or more of a public corporation, who does not have approval of
the board of directors, must make a tender offer for the remain-
ing outstanding
stock at market value.'
45
Although the takeover laws may make the threat of green-
mail less likely by making it more difficult to acquire a substan-
tial stake in a company, the practice is nowhere prohibited.
Moreover, a recent United States Supreme Court decision
placed the constitutionality of many of the state takeover stat-
utes "under a cloud."'
14
In Edgar v. MITE Corp.,
47
the Su-
preme Court held that the Illinois Business Take-Over Act
48
was unconstitutional because it created an unreasonable indirect
burden on interstate commerce in violation of the Commerce
Clause.
49
In addition, three Justices held that the statute was
143. This approach has also been followed by Minnesota and Wisconsin. See Lewin,
supra note 142.
144. See Lewin, supra note 142.
145. See Pennsylvania Bill on Dissident Stakes Clears Legislature, Wall St. J.,
Dec. 15, 1983, at 42, col. 1; Inman, Pennsylvania Senate is Seen Near Vote on Bill that
May Deter Dissident Investors, Wall St. J., Dec. 6, 1983, at 12, col. 1.
146. See HOUSE REPORT, supra note 7, at 13.
147. 457 U.S. 624 (1982).
148. ILL. ANN. STAT. ch. 121-1/2, 137.51-70 (Smith-Hurd 1985).
149. See MITE, 457 U.S. at 646. Before the MITE decision was issued, state take-
over laws had already encountered a great deal of opposition in the lower courts. See,
e.g., Kennecott Corp. v. Smith, 637 F.2d 181 (3d Cir. 1980) (reasonable likelihood that
the New Jersey Tender Offer Act which delayed takeover for five days was preempted by
the Williams Act, according to the Third Circuit); Hi-Shear Industries, Inc. v. Neiditz,
FED. SEC. L. REP. (CCH) 97,805 (D. Conn. Dec. 3, 1980) (district court in Connecticut
held that the target company's option to hold a hearing on the adequacy of the bidder's
disclosure under the Connecticut Tender Offer Act would violate the Supremacy and
Commerce Clauses of the U.S. Constitution if the Commissioner found that the Act was
preempted by the Williams Act); Hi-Shear Industries, Inc. v. Campbell, FED. SEc. L. REP.
(CCH) T 97,804 (D.S.C. Dec. 4, 1980) (district court in South Carolina held that the
South Carolina Tender Offer Disclosure Act was preempted by the Williams Act because
it caused tender offer delays). See also State Takeover Statutes and the Williams Act
(A Report of the Subcommittee on Proxy Solicitations and Tender Offers of the Federal
Regulation of Securities Committee), 32 Bus. LAw. 187 (1976):
[a]nother fundamental objection to the state takeover statutes which has been
raised is their extraterritorial application. Historically, state blue sky laws have
regulated transactions in which the buyer is physically located within the state.
The takeover statutes purport to govern transactions between the purchaser and
19851
27
preempted by the federal Williams Act legislation under the
Supremacy Clause of the United States Constitution.
5
'
The Illinois statute provided, inter alia, that the Secretary
of State could pass upon the fairness of a takeover offer made by
a bidder based upon information disclosed pursuant to the stat-
ute.
15
' In addition, the Secretary had the power to call a hearing
for the protection of the offerees upon the written request of the
non-employee directors of the target company.
152
The Court
found that these procedures conflicted with and were preempted
by the Williams Act which requires that neither target nor bid-
der gain an unfair advantage under tender offer statutes.
53
The
Court found that the Illinois statutory provisions favored target
management by delaying the tender offer process at the expense
of the
bidder.1
5 4
At the time of the MITE decision, approximately thirty-five
states had takeover legislation.
55
As a result of the decision, the
constitutionality of many of these statutes was placed in ques-
tion and many state legislatures enacted new takeover statutes
to conform with the MITE decision.
56
However, most of these
statutes are still untested.
57
The MITE decision suggests that
the seller neither of which is physically within the state.
Id. at 189.
150. MITE, 457 U.S. at 639.
151. Id. at 627.
152. Id.
153. Id. at 639.
154. Id. at 635.
155. See Hearings, supra note 27, at 286.
157. The Minnesota Take-Over Act, which was revised in 1984 to reduce its burden
on interstate commerce and tighten its relation to in-state investors, was upheld by the
Eighth Circuit as "not facially unconstitutional." The court held that the Act could be
narrowly construed to be consistent with the Williams Act. The court noted that the Act
was "not unduly burdensome on interstate commerce" and served a legitimate state in-
terest in protecting local investors. Cardiff Acquisitions v. Hatch, 751 F.2d 906 (8th Cir.
1984).
Recent proposed legislation to make the New York anti-takeover act conform to the
MITE decision was sponsored by Assemblyman G. Oliver Koppell (D-Bronx) (A 6971-A)
and Senator Jay P. Rolison, Jr. (R-Poughkeepsie) (S 5846-A). See Governor to Meet
With CBS and Turner on Takeover Bill, N.Y.L.J., July 10, 1985, at 1, col. 3. In Minstar
v. Abrams, 85 Civ. 3173 (MJL), Minstar Acquiring Corp., headed by raider Irwin Jacobs,
(see supra note 50), attempted to have the current New York anti-takeover statute de-
clared unconstitutional, but the Attorney General Robert Abrams and the other defen-
dants stipulated to effective non-enforcement of the statute and mooted the issue. This
GREENMAIL
even if the states were to develop takeover legislation that regu-
lated the greenmail transaction, either by barring the raider
from threatening greenmail or the target from paying it, it might
well suffer the same fate as the Illinois statute by "tipping the
balance" so carefully preserved by the Williams Act.
In sum, state corporation law does not prevent the target
from paying greenmail and state takeover legislation has not at-
tempted to regulate the practice, nor is it entirely clear that
such an attempt would be constitutional.
4. Existing Common Law
Although the term "greenmail" is a relative newcomer to
the judicial system,
158
the practice itself is not new.
159
State laws
permitting a corporation to repurchase its own shares,"'
0
as dis-
cussed in Section III(B)(3) supra, are subject to an additional
common law requirement that the corporate directors fulfill
their fiduciary duties of care and loyalty in making the
purchases.
61
However, these fiduciary duties have not been ef-
fectively utilized by the courts as a means to prohibit the prac-
tice of greenmail.1
6 2
The primary obstacle to their effectiveness
unreported decision was discussed in Minstar Acquiring Corp. v. AMF Inc., No. 85 Civ.
3800 (MJL) (S.D.N.Y. June 7, 1985) (available Nov. 7, 1985, on LEXIS, Genfed library,
Dist file).
158. The term "greenmail" is only briefly mentioned in three federal cases: Trans
World Airlines, Inc. v. Icahn, No. 85 Civ. 3677 (MJC) (S.D.N.Y. May 28, 1985); Scientific
Computers, Inc. v. Edudata Corp., 599 F. Supp. 1092 (D.C. Minn. 1984); Asarco Inc. v.
M.R.H. Holmes A COURT, 611 F. Supp. 468 (D.N.J. 1985). The term is used in three
state cases: Heckmann v. Ahmanson, 214 Cal. Rptr. 177 (Cal. Ct. App. 1985); Unocal
Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985); Moran v. Household Int'l, Inc.,
490 A.2d 1059 (Del. Ch. 1985).
160. In Wolgin v. Simons, 722 F.2d 389 (8th Cir. 1983), the plaintiff tried unsuccess-
fully to argue that the repurchase of its own shares by the target company was an ultra
vires act. The court held that the corporation's agreement to repurchase its stock from a
tender offeror at a substantial premium was lawful. The court stated that "[a] corpora-
tion acts 'ultra vires,' or beyond its power, when it acts in an area outside the scope of
the power allowed by its charter or statute." Id. at 393. The court ruled that since the
state statute and corporate charter did not prohibit such a repurchase, the officers had
not committed an ultra vires act.
161. See Gilson, supra note 79, at 821-31.
162. Id. Cf. infra notes 181, 182, 204, 210 and accompanying text. The courts have
been reluctant to apply a strict fiduciary standard to corporate directors, since most cor-
porate decisions involve some degree of self-interest. This reluctance has solidified in the
1985]
29
has been the courts' application of the business judgment rule.
163
The rule bars judicial inquiry into actions or decisions of corpo-
rate management when they are made in good faith and in the
exercise of honest judgment."
6 4
Cheff v. Mathes"
e5
is regarded as the leading case dealing
with the the application of the business judgment rule to the
repurchase of stock by an issuer.
1"
The case involved a stock-
holders' derivative suit in which the plaintiffs alleged that the
directors of the corporation had violated their fiduciary duties to
the shareholders by improperly purchasing stock at a premium
from a dissident shareholder in an effort to perpetuate their own
control.
1 6 7
The directors defended their position on the basis
that an informal investigation had revealed that the dissident
shareholder was accumulating a significant stake in the company
and had "been a participant, or attempted to be, in the liquida-
tion of a number of companies."
168
The directors asserted that
given this background, they refused to entertain his demand to
form of the business judgment rule. In Johnson v. Trueblood, 629 F.2d 287 (3d Cir.
1980), cert. denied, 450 U.S. 999 (1981), the court stated:
[i]t is frequently said that directors are fiduciaries. Although this statement is true
in some senses, it is also obvious that if directors were to be held to the same
standard as other fiduciaries the corporation could not conduct business... . Yet
by the very nature of corporate life a director has a certain amount of self-interest
in everything he does. . . .The business judgment rule seeks to alleviate this
problem by validating certain situations that otherwise would involve a conflict of
interest for the ordinary fiduciary.
Id. at 292.
163. In Moran v. Household Int'l, Inc., 490 A.2d 1059 (Del. Ch. 1985), the court
stated that:
[tihe business judgment rule has evolved as a corollary to the principle that a
board of directors stands in a fiduciary relationship to the shareholders it repre-
sents. Because the role of a fiduciary ordinarily does not admit of any conflicting
interests or conduct the business judgment rule seeks to accomodate that status to
the realities of the business world.
Id. at 1074.
See also Johnson v. Trueblood, 629 F.2d 287, 292 (3d Cir. 1980), cert. denied, 450
U.S. 999 (1981).
164. The business judgment rule, in effect, creates a presumption of good faith on
the part of corporate directors and places the burden of demonstrating bad faith on the
complainant. See Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
165. 41 Del. Ch. 494, 199 A.2d 548 (1964).
166. See Harrington, If It Ain't Broke, Don't Fix It: The Legal Propriety of De-
fenses Against Hostile Takeover Bids, 34 SYRACusE L. REV. 977, 992 (1983).
167. Cheff, 41 Del. Ch. at 502, 199 A.2d at 553.
168. Id. at 499, 199 A.2d at 551.
GREENMAIL
be placed on the board of directors.
69
Moreover, when twenty-
five key employees left amid threats of a takeover, the directors
decided to buy back the shareholder's stake in the company.
170
The directors argued that their informal investigation and sub-
sequent events indicated that it was in the best interests of the
corporation
to repurchase
the stock.
1
'
The Delaware Supreme Court held in favor of the directors
and, applying the business judgment rule, refused to find that
the directors had an "improper purpose" in making the stock
repurchase.
72
The court adopted a two-prong test to ascertain
the scope of a director's fiduciary duty in the repurchase of cor-
porate shares in response to a takeover threat.
73
The first prong
of the test, derived from an earlier Delaware case, Kors v. Ca-
rey,
74
requires a showing by the directors that the decision to
repurchase was made in a good faith belief that "buying out of
the dissident stockholder was necessary to maintain what the
board believed to be proper business practices . . . ."I" Fur-
thermore, under this subjective test of motivation, "the board
will not be held liable for such decision, even though hindsight
indicates the decision was not the wisest course.'
7
The second more objective prong of the Cheff test derives
from another earlier Delaware case, Bennett v. Propp.
177
In the
169. Id. at 500, 199 A.2d at 551.
170. Id. at 500, 199 A.2d at 552.
171. Id. at 507, 199 A.2d at 556.
172. Id. at 508, 199 A.2d at 556-57.
173. Id. at 504, 199 A.2d at 554.
174. 158 A.2d 136 (Del. Ch. 1960). In Kors, the plaintiff alleged that the target
board of directors had misused corporate funds in purchasing its stock from an aquisitor
at an excessive price for the sole purpose of maintaining control over the company. The
court disagreed with the plaintiffs in deciding that the board had in "good faith" elimi-
nated a clear threat to the future of the business. The court also stated that if the repur-
chase had been made for the "sole purpose" of retaining control, then it would have been
improper. Id. at 141.
175. Chefi, 41 Del. Ch. at 504, 199 A.2d at 554.
176. Id. at 504, 199 A.2d at 554.
177. 187 A.2d 405 (Del. Ch. 1962). In Bennett, a director committed the corporation
to repurchase its shares. When the other directors were informed of the commitment,
they decided to ratify the agreement only because they feared embarrassment to the
corporation if they did not agree. The court held the purchasing director liable, but the
remaining directors were not held liable. The court made exception to the "improper
purpose" doctrine and held that such a decision would be permitted if made upon "prior
ignorance and immediate emergency." Id. at 411. See also Potter v. Sanitary Co. of
1985]
31
PACE LAW REVIEW
words of the Cheff court: "[o]n the other hand, if the board has
acted solely or primarily because of the desire to perpetuate
themselves in office, the use of corporate funds for such purpose
is improper.
' 178
This has been called the "improper purpose" or
"sole purpose" test.
179
To satisfy this half of the Cheff test, cor-
porate directors must merely show that a reasonable investiga-
tion of the facts was conducted before the purchase and that the
purchase was made in the best interests of the corporation.
8 0
The legal effect of the Cheff decision on similar cases has
been to protect target management from challenge by corporate
shareholders.'
8
' Directors need only articulate a business pur-
pose for making a stock repurchase, made in good faith, to sat-
isfy the test under the Cheff formulation of the business judg-
ment
rule.1
8 2
However, a recent case decided by a California Superior
Court gives an indication that under some circumstances the
payment or receipt of greenmail may constitute a violation of a
fiduciary duty to corporate stockholders. In Heckmann v.
Ahmanson,'
18 3
the court affirmed the lower court's decision to is-
sue a preliminary injunction which effectively created a con-
structive trust on profits obtained by a dissident shareholder
group, amounting to $60 million, from a greenmail transaction
with Walt Disney Productions, Inc.
184
The plaintiff stockholders
of Disney alleged that the "Steinberg Group"'
8
8 had breached its
America, 22 Del. Ch. 110, 194 A. 87 (1937).
179. See E. FOLK, III, THE DELAWARE GENERAL CORPORATION LAW (1972).
181. See Gilson, supra note 79, at 827-29 (criticizing the Cheff decision); Harring-
ton, supra note 166, at 993 ("it does not require great creativity to conjure up 'policy'
differences with a potential bidder, the practical effect of the Cheff tests is to collapse
duty of loyalty-conflict of interest cases into duty of care-business judgment cases.").
182. See supra note 181. In Trans World Airlines, Inc. v. Icahn, No. 85 Civ. 3677
(MJC) (S.D.N.Y. May 28, 1985), the court suggested that the recent decision in Unocal v.
Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), which granted broad powers to target
management under the business judgment rule, might actually condone a form of "re-
verse greenmail." The decision suggested that, at least under Delaware law, the target
company might be able to exclude the raider's shares from a securities exchange offer to
the remaining shareholders through a form of "reverse greenmail."
183. 214 Cal. Rptr. 177 (1985).
184. Id. at 188.
185. The "Steinberg Group" consisted of defendants, Saul P. Steinberg, Reliance
Financial Services Corporation, Reliance Group, Inc., Reliance Group Holdings, Inc., Re-
[Vol. 6:69
1985] GREENMAIL
duty to the other corporate stockholders by agreeing to accept
the payment of greenmail in return for terminating a derivative
stockholder suit against Disney.
1 6
In that derivative lawsuit, the
"Steinberg Group" had sought to block Disney from acquiring
Arvida, a company heavily laden with debt, in an attempt to dis-
courage the "Steinberg Group" from increasing its holdings in
Disney and attempting a takeover.
18 7
The greenmail payment re-
sulted in a $60 million profit to the "Steinberg Group," and
placed Disney under an even heavier burden of debt.
188
The court stated that the plaintiffs had demonstrated a rea-
sonable likelihood of success
189
on the merits under two theories:
that the "Steinberg Group" was liable as an aider and abettor of
the Disney directors' breach of fiduciary duty,
19
and that they
were independently liable for breach of fiduciary duty as "con-
liance Insurance Co., Reliance Insurance Co. of New York, United Pacific Insurance Co.,
United Pacific Life Insurance Co., and United Pacific Insurance Co. of New York. Id. at
180 n.2.
186. Id. at 181.
187. Id. at 180.
188. Id. at 181.
189. The court did not decide the case on the merits. The sole issue was whether a
preliminary injunction should be granted to entitle the plaintiffs to a constructive trust
on the profits reaped in the stock sale of the "Steinberg Group." Accordingly, the court
sought to determine if the plaintiffs were likely to suffer greater injury from a denial of
the injunction than the defendants were likely to suffer from its grant; and if there was
reasonable probability that the plaintiffs would prevail on the merits.
190. Heckman, 214 Cal. Rptr. at 182. The plaintiffs sued the defendants under sev-
eral theories of breach of fiduciary duty. First, the plaintiffs argued, successfully, that
there was a reasonable probability that the "Steinberg Group" breached its fiduciary
duty as a plaintiff in a stockholders derivative action. The plaintiff relied on the decision
in Shelton v. Pargo, Inc., 582 F.2d 1298 (4th Cir. 1978). The court reasoned that as a
plaintiff in a derivative action, the "Steinberg Group" assumed a fiduciary role as repre-
sentatives of the other similarly situated plaintiff-shareholders. It appeared likely that
the "Steinberg Group" had abandoned this role for "personal aggrandizement."
Heckman, 214 Cal. Rptr. at 185 (quoting Shelton v. Pargo, Inc., 582 F.2d 1298, 1305 (4th
Cir. 1978)).
Second, the plaintiffs citing Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 81 Cal.
Rptr. 592, 460 P.2d 464 (1969), argued that the "Steinberg Group" breached its fiduciary
duty as a controlling shareholder to other shareholders. Under this theory, a controlling
shareholder assumes a fiduciary responsibility by virtue of his ability to influence corpo-
rate policy as a major shareholder. Heckman, 214 Cal. Rptr. at 182.
Finally, the plaintiffs successfully contended that the defendants acted as aiders and
abettors of Disney's directors' breach of fiduciary duty. Under this theory of liability, the
"Steinberg Group" acted to facilitate the Disney directors to use the power and position
for personal gain and to the detriment of the corporation. The Disney directors failed to
meet the threshold requirement of showing an absence of self dealing. Id. at 183.
33
PACE LAW REVIEW
[Vol. 6:69
trolling shareholders.
'
"
191
Under the first rationale, the court
stated that "[t]he acts of the Disney directors - and particu-
larly their timing - are difficult to understand except as defen-
sive strategies against a hostile takeover."
192
The court saw this
as ample preliminary evidence that the directors had "received a
personal benefit from the transaction.'
' 93
This showing was suf-
ficient to shift the burden of proof under the business judgment
rule to the directors to show fair dealing.
194
Thus the court sug-
gested that the greenmail payment may have constituted a
breach of fiduciary duty by the directors, for which the "Stein-
berg Group" could also be liable as aiders and abettors.
The business judgment rule operates to shield corporate di-
rectors from liability for their decisions as long as they are made
in good faith and without self-dealing.
95
A related issue to the
protection offered by the business judgment rule, is the prelimi-
nary protection provided by the burden of proof.
96
Generally,
the complaining shareholder has the initial burden of proof to
show the existence of self-dealing
on the part of the directors.
97
Once this is demonstrated, the burden then shifts to the direc-
191. Heckman, 214 Cal. Rptr. at 184.
192. Id. at 183.
193. Id.
194. Id. "While there may be many valid reasons why corporate directors would
purchase another company or repurchase the corporation's shares, the naked desire to
retain their positions of power and control over the corporation is not one of them." Id.
at 182.
See also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985): "[wje must
bear in mind the inherent danger in the purchase of shares with corporate funds to re-
move a threat to corporate policy when a threat to control is involved. The directors are
of necessity confronted with a conflict of interest, and an objective decision is difficult."
Id. at 955 (quoting Bennet v. Propp, 187 A.2d 405, 409 (Del. 1962)).
195. See supra note 164 and infra note 196 and accompanying text.
196. The duty of loyalty required a corporate director to act in good faith, and
where he is shown to have a self-interest in the transaction, the burden shifts to him.
Horwitz v. Southwest Industries, Inc., 604 F. Supp. 1130 (D.C. Nev. 1985). When the
director is charged with a breach of his fiduciary duty, he may utilize the business judg-
ment rule to bar inquiry into actions taken in good faith and in the exercise of honest
judgment. Id. The business judgment rule serves as a defense for directors when it is
shown that they acted in a good faith belief that their actions were in the best interests
of the corporation, that they exercised due care before acting, and that they did not act
in self-interest. Whittaker Corp. v. Edgar, 535 F. Supp. 933, 950 (N.D. Ill. 1982). Addi-
tionally, directors have a right to rely on information even if it later turns out to be
erroneous. Panter v. Marshall Field Co., 646 F.2d 271 (7th Cir. 1981).
197. Whittaker, 535 F. Supp. at 950-51.
GREENMAIL
tors to demonstrate that the decision was honestly considered by
the directors to be in the best interests of the corporation.
8
'
This has proven to be a nearly impossible initial burden of proof
to meet, since it is difficult to prove self-dealing in takeover tac-
tics where the interests of the corporation are always arguably at
stake.'
9 9
The courts have not been consistent in their require-
ments to shift the initial burden of proof from the complaining
shareholder to the corporate directors under the business judg-
ment rule.
200
In Treadway Companies, Inc. v. Care Corp.,
2 0
the
insurgent shareholder (Care Corp.) was sued by Treadway for
conspiring to take control of the company.
20 2
Care Corp. coun-
terclaimed on the theory that the directors of Treadway had im-
properly sold corporate property to a third party, Fair Lanes,
Inc., as a white knight, in order to perpetuate their own control
over the company.
203
The court held that directors are presumed
to act in good faith unless a conflict of interest can be demon-
strated by the plaintiff.
20 4
Thus, the plaintiff must sustain his
initial burden of proof by demonstrating a conflict of interest to
overcome the presumption that the directors acted in good faith.
However, in Johnson v. Trueblood,
5
the court stated that
merely showing "a" motive to retain control does not, per se,
constitute a conflict of interest.
26
The plaintiff was required to
show that the "sole or primary motive" of the directors was to
retain control.
2 7
The court also noted that "control is always
arguably 'a' motive in any action taken by a director.
' 20 8
The
198. Id.
199. See infra note 205 and accompanying text.
201. 638 F.2d 357 (2d Cir. 1980).
202. Id. at 365.
203. Id.
204. Id. at 382-83.
205. 629 F.2d 287 (3d Cir. 1980), cert. denied, 450 U.S. 999 (1981).
206. Id. at 292. In Johnson, the plaintiffs, who owned 47% of a real estate develop-
ment company, sued the defendant directors, who owned 53% of the company, for im-
properly rejecting a proposed purchase of stock which would have been financially bene-
ficial to the ailing corporation. The plan involved a purchase, by the plaintiffs, of $20,000
of stock and a purchase, by one of the defendant directors, of $15,750 of stock. The plan
would have created a change in control in favor of the plaintiffs. The court held that the
defendants' position was protected by the business judgment rule.
207. Id. at 293.
208. Id. at 292.
1985]
35
PACE LAW REVIEW
effect of this holding was to create a protective shield for man-
agement since plaintiffs must allege something more than a de-
sire to maintain control in order to shift the burden of proof to
the directors.
20 9
The courts have thus been willing to condone
any defensive strategy as long as it could be attributed to a "ra-
tional
business
purpose.
''21
0
Despite these decisions, there has been growing conviction
among legal scholars that directors have an inherent conflict of
interest within the context of a hostile takeover.
2 11
According to
Professor
William D. Harrington:
212
[t]he business judgment rule was never meant to be applied in
cases involving judgments by directors who are interested in the
transaction, and the evidence is overwhelming that, to say the
very least, directors must necessarily find it exceedingly difficult
to act independently in a takeover contest where the incumbent
managers to whom they are beholden for their status are to lose
both control of the corporation and likely their jobs as well.
213
This perspective has found support in a recent Second Cir-
cuit decision, Norlin Corp. v. Rooney, Pace, Inc.,214 in which the
court rejected the notion that any action taken by target man-
agement during the course of a takeover attempt should be sanc-
tioned by the presumption that the board of directors acted in
209. See Gruenbaum, Acquisitions and Mergers, 4 CoRp. L. REv. 263, 265 (1981).
210. Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971). See also Terrydale
Liquidating Trust v. Barness, 611 F. Supp. 1006, 1019 (S.D.N.Y. 1984). The court stated
that a "somewhat more deferential standard has been applied (to the business judgment
rule) where retention of control is the alleged basis for self-interest," citing Panter v.
Marshall Field Co., 646 F.2d 271 (7th Cir. 1981); Johnson v. Trueblood, 629 F.2d 287 (3d
Cir. 1980); Northwest Indus. v. B.F. Goodrich Co., 301 F. Supp. 706, 712 (N.D. Ill. 1969).
The "primary purpose" standard has also been held to be applicable to prospective anti-
takeover tactics. See Warner Communications v. Murdoch, 581 F. Supp. 1482, 1491 (D.
Del. 1984).
211. See Gruenbaum, supra note 176, at 267; Harrington, supra note 166, at 1021-
22; Prentice, supra note 79, at 344; Steinberg, Some Thoughts on the Regulation of
Tender Offers, 43 MD. L. REv. 240, 243 (1984); Note, Tender Offer Defensive Tactics and
the Business Judgment Rule, 58 N.Y.U. L. REv. 621, 649-58 (1983) (proposing that if it
appears likely that management would have been replaced after a takeover, and they
engage in defensive maneuvers, there should be no presumption of good faith under the
business judgment rule).
212. William D. Harrington is an associate professor of law at St. John's University
School of Law.
213. See Harrington, supra note 166, at 1021-22.
214. 744 F.2d 255 (2d Cir. 1984).
[Vol. 6:69
GREENMAIL
good faith.
21 5
In this case, Norlin's directors feared a takeover
attempt by Piezo Electric Products, Inc.
216
After failing to pro-
cure injunctive relief, Norlin transferred 800,000 shares of au-
thorized but unissued preferred voting stock to a wholly-owned
subsidiary in exchange for a $20 million interest-bearing note.
2
"
7
In addition, Norlin created an employee stock option plan and
transferred 185,000 shares of common stock to the plan in ex-
change for a promissory note.
21 8
Three Norlin directors were ap-
pointed as trustees to the plan. As a result of these actions, Nor-
lin's directors controlled forty-nine percent of the company's
outstanding stock.
219
The court held that the plaintiff had made an adequate
showing of a lack of good faith on the part of the Norlin direc-
tors to shift the burden to them. The court found that the fact
that Norlin had issued stock to parties controlled by the direc-
tors in return for debt indicated a lack of good faith.
220
More-
over, the court rejected Norlin's assertion that the threatened
takeover bid supplied the necessary justification for all subse-
quent actions by the board of directors.
22
' The court found that
Norlin had failed to demonstrate that its directors had fulfilled
their duty of loyalty under the business judgment rule merely by
asserting that their actions were taken to forestall a takeover
threat.
222
The Norlin case has demonstrated a possible willingness by
the judiciary to give "new teeth" to its construction of the busi-
ness judgment rule and its burden of proof requirements.
223
By
215. Id. at 265-66.
216. Id. at 259.
217. Id.
218. Id.
219. Id.
220. Id. at 265.
221. Id. at 265-66.
222. Id. at 267.
223. See Junewicz, Mergers and Acquisitions: Advanced Planning Is Necessary To
Battle New Defense Strategies, The Nat'l L. J., Oct. 8, 1984, at 18, col. 1 (suggesting
that the Norlin decision indicates that management may be under greater scrutiny under
the business judgment rule).
In its report accompanying H.R. 5693, the House Committee on Energy and Com-
merce also indicated its belief that the Norlin decision may reflect an increasing judicial
sensitivity to the inherent conflict of interest of target management in takeover situa-
tions. (See HoUsE REPORT, supra note 7, at 15-16).
1985]
37
PACE LAW REVIEW
lowering the initial standard of the plaintiff's burden of proof,
thereby making it easier to show that the directors lacked good
faith, the Norlin court effectively reduced the scope of manage-
ment's protection under the business judgment rule. Although
this new test has not yet been applied to the greenmail situation,
it suggests that greenmail may also be viewed in a harsher
light.
224
IV. Three Proposed Amendments to Federal Securities Laws
to Regulate Greenmail
In the preceding section, this comment analyzed existing
laws and commercial mechanisms available to regulate greenmail
and concluded that all fail to adequately address the problem.
This section looks at three proposed federal bills, H.R. 5693,
H.R. 5694 and H.R. 5695,225 which are designed to address vari-
ous problems posed by defensive maneuvers that companies em-
ploy in response to hostile takeover attempts. Although all three
bills have advantages and disadvantages, this section concludes
that none is completely effective in eliminating the problem of
greenmail.
A. H.R. 5693
H.R. 5693,226 known as the Tender Offer Reform Act of
1984, was first introduced in the House of Representatives along
with H.R. 5694227 and H.R. 5695228 by Rep. Timothy Wirth (D-
224. The Norlin case has been cited with approval by a number of courts, e.g., Min-
star Acquiring Corp. v. AMF, Inc., No. 85 Civ. 3800 (MJL) (S.D.N.Y. June 7, 1985) (ap-
plied the Norlin decision in granting a preliminary injunction to prevent target manage-
ment from implementing "scorched earth" and "poison pill" defenses in response to
plaintiff's tender offer); Terrydale Liquidating Trust v. Barness, 611 F. Supp. 1006
(S.D.N.Y. 1984) (applied Norlin in denying the defendant directors' motion for summary
judgment under the business judgment rule). Cf. Rieuman v. Burlington Northern R.R.
Co., No. 85 Civ. 3694 (RLC) (S.D.N.Y. June 21, 1985); Hecco Ventures v. Avalon Energy
Corp., No. 85 Civ. 2438 (RWS) (S.D.N.Y. Apr. 12, 1985); Horwitz v. Southwest Forest
Indus., 604 F. Supp. 1130 (D. Nev. 1985); Enterra Corp. v. S.G.S. Assoc., 600 F. Supp.
678 (E.D. Pa. 1985).
225. 98th Cong., 2d Sess., 130 CONG. REc. H4357-60 (daily ed. May 22, 1984).
226. H.R. 5693 was designed to amend 13(d)(1) of the Securities Exchange Act of
1934, 15 U.S.C.A. 78(m)(d)(1) (West 1981).
227. 98th Cong., 2d Sess., 130 CONG. REc. H4357-60 (daily ed. May 22, 1984).
228. Id.
[Vol. 6:69
GREENMAIL
Colo.) on May 22, 1984.229 H.R. 5693 was the only draft bill of
the three to be approved by the House Committee on Energy
and Commerce.
2
" The bill has not yet been voted on by the full
House.
2
"' H.R. 5693, which would amend the Securities Ex-
change Act of 1934, was designed to eliminate a variety of abu-
sive defensive tactics employed during hostile takeovers, includ-
ing "golden parachutes,"
23 2
self-tenders after a bidder has made
a tender offer,
233
the issuance of new voting securities,
234
the
"13D ten-day window,
' 23 5
and greenmail.
"
'
Under the provisions of H.R. 5693 applying to greenmail,
the target company would be prohibited, absent stockholder ap-
229. Id.
230. H.R. 5693 was approved with amendments by the House Energy and Com-
merce Committee on September 17, 1984, and was reported as H.R. 98-1028. The House
Subcommittee on Telecommunications, Consumer Protection and Finance held two days
of hearings on the proposed bill on March 28, 1984 and May 23, 1984.
231. A companion bill was introduced in the Senate by Senator Donald W. Riegle
(D-Mich.) on June 20, 1984. S. 2784 was referred to the Senate Committee on Banking,
Housing and Urban Affairs. Neither the House nor the Senate voted on the two bills,
however, Rep. Timothy Wirth (D-Colo.) and Sen. Alphonse D'Amato (R-N.Y.) indicated
their intentions to hold new hearings in 1985. See Crock, A Drive to Rein in Raiders,
Bus. WK., Jan. 21, 1985, at 129.
232. H.R. 5693 would prohibit directors of the target company from entering into
"golden parachute" contracts during a tender offer. Golden parachutes are termination
contracts for top-level management, providing for substantial sums of money and bene-
fits, to be exercised if the director or manager is terminated from his employment as the
result of a change in control of the company. See generally Riger, On Golden Parachutes
- Ripcords or Ripoffs: Some Comments on Special Termination Agreements, 3 PACE L.
REV. 15 (1982).
233. H.R. 5693 would prohibit the issuing company from making a tender for its
own shares during the pendancy of a tender offer by a third party except through ongo-
ing programs undertaken in the ordinary course of the issuer's business. See Hearings,
supra note 27, at 219 and text accompanying note 27.
234. H.R. 5693 would make it unlawful for the target company, during a tender of-
fer, to issue five percent or more of its securities without shareholder approval. See
Hearings, supra note 27, at 220 and text accompanying note 27. See generally Asarco,
Inc. v. M.R.H. Holmes A COURT, 611 F. Supp. 468 (D.N.J. 1985) (the court granted
preliminary injunction to prevent target company from issuing 3.1 million shares of pre-
ferred stock during a tender offer by the defendant. The stock had several rights which
far exceeded that of the common stock, including lucrative liquidation rights, a right to
purchase common stock at half of the -market price upon a change in control of the
company, and voting rights equivalent to five votes of common stock).
235. See infra notes 246-249 and accompanying text. See generally Sargent, An-
titakeover Maneuvers: Developments in Defense Tactics and Target Actions for Injunc-
tive Relief, 35 Sw. L.J. 617, 632-33 (1981).
236. See Hearings, supra, note 27, at 210 (statement by Rep. Matthew Rinaldo (D-
N.J.)).
1985]
39
PACE LAW REVIEW
proval, from repurchasing its own securities from an acquisitor
who held a three percent or greater stake for less than two years,
unless the same above-market premium was offered to all share-
holders by the target.
37
In the author's opinion, the bill's two most attractive fea-
tures are the three-percent stake and two-year holding require-
ments. The three-percent stake requirement is desirable because
under section 13(d) of the Williams Act
238
the acquisitor is not
subject to disclosure requirements until he becomes the benefi-
cial owner of five percent or more of the target's outstanding
securities. Many greenmail transactions occur when the acquirer
holds less than five percent of the target, thus escaping the dis-
closure requirements of the 13D Schedule.
2 9
The 13D Schedule
requires, inter alia, that the acquisitor reveal his purpose for
making the acquisition and state whether a "control motive" is
contemplated as a result of the increased stake.
240
Often corpo-
rate raiders claim the acquisition is "for investment purposes
only,
2 41
and later file an amendment to the form when a "con-
237. 98th Cong., 2d Sess., 130 CONG. REC. H4357-60 (daily ed. May 22, 1984).
238. 15 U.S.C.A. 78m(d)(1) (West 1981).
239. 17 C.F.R. 240.13d-1 (1985). One commentator has noted that many raiders
appear to be trying to avoid the Schedule 13D filing by accumulating stock just short of
the five percent level. See Disguised Forms, supra note 4. "Now greenmailers sit tight at
4.9 percent and bear down a little harder on management, says one New York arbitrager.
'There may be less blood in the water, but the sharks are still out there.'" Id. at 1028.
Many recent incidents of greenmail support this conclusion. For instance, Superior
Oil paid $167 million to Mesa Petroleum for its three-percent stake in the company. See
Hill, Dahl and Finn, Mesa's Pickens, Partner Plan Tender Offer For 15 Million Shares
of Philips Petroleum, N.Y. Times, Dec. 5, 1984, at 1, col. 4; The Takeover Game Isn't
Over at Superior Oil, Bus. WK., Sept. 19, 1983, at 103. Chesebrough-Ponds, Inc. paid
$68.6 million (and agreed to purchase the acquisitor's unprofitable corporate division for
an additional $95 million) for a less than five percent stake in the company. Donovan,
supra note 37. Pioneer Corp. paid $83 million to a shareholder (who remained anony-
mous by the terms of the agreement) for a less than five-percent stake. See Disguised
Forms, supra note 4; Williams, supra note 19.
240. 15 U.S.C.A. 78m(d)(1)(C) (West 1981) requires that the purchaser of five per-
cent or more of the equity security must file a statement of intent of such purpose in
acquiring the stock with the SEC. For a definition of "control" see 17 C.F.R. 240.12b-2
(f) (1985). For a complete discussion of "control purpose" under 13(d) see Annot., 57
A.L.R. FED. 806 (1982).
241. See Feinberg, Little Guys Unite! A Modest Proposal on Greenmail, BARRON'S,
Oct. 29, 1984, at 62.
Later that night I had a dream. I imagined that I had bought 100 shares of
General Motors and on a whim had filed a 13(d) statement with the SEC an-
nouncing the purchase. When reporters called and expressed surprise that I had
[Vol. 6:69
19851 GREENMAIL
trol motive" materializes.
242
Although the 13D Schedule does not
appear to minimize the perceived threat of a takeover since the
form can be easily amended at any time, the information exists
at an early stage to alert investors to the possibility of a take-
over or threat of greenmail. By the same token, the three-per-
cent trigger of H.R. 5693 is valuable because it improves upon
the existing section 13(d) requirements and would alert investors
at yet an earlier stage.
H.R. 5693 would only apply its corporate buyback restric-
tion to accumulations of a three percent or greater stake held for
less than two years.
2 43
The two-year holding requirement is also
valuable for the purpose of identifying those investors who have
made large stock accumulations in a short period of time and
who therefore pose a greater threat of greenmail.
2
" Although the
author knows of no formal study of the time elapsed after the
raider's initial acquisition of stock and the subsequent an-
nouncement of the greenmail payment, the two-year provision
has a certain logical appeal. Legislators and the SEC have
demonstrated their concern about fast, unmonitored stock accu-
mulations and maneuvers by raiders which cause shareholders to
made such a filing when I did not own 5 percent of the company's stock, I replied,
"Not yet, I don't." Then I was asked, "Are you buying General Motors solely for
investment purposes?"
"I wouldn't say that," I said. The slight knowing smile of the financier could
be seen on my face.
Detroit trembled and my shares soared.
Upon awakening, I realized how unfair it is now thinking of outlawing green-
mail before the little guy has had a chance to experiment with this investment
strategy.
Id.
242. The requirement for a "control purpose" does not appear to have been en-
forced very strictly by the courts, and often an amendment is the relief granted. See e.g.,
Treadway Companies, Inc. v. Care Corp., 638 F.2d 357 (2d Cir. 1980) (amended schedule
which indicated real control purpose was acceptable); Purolator, Inc. v. Tiger Int'l, Inc.,
510 F. Supp. 554 (D.D.C. 1981) (fair accuracy at time of filing, not perfection, is the
appropriate standard of control purpose); Kirsch Co. v. Bliss & Laughlin Indus., 495 F.
Supp. 488 (W.D. Mich. 1980) (court found that the corporation had intent to control and
enjoined it from further acquisitions until an amended schedule was filed); Graphic Sci-
ences, Inc. v. International Mogul Mines, Ltd., 397 F. Supp. 112 (D.D.C. 1974) (mislead-
ing statements on schedule required to be amended). Such amendment is permitted
under 17 C.F.R. 240.13d-2 (1985).
243. See supra notes 6, 237 and accompanying text.
244. See generally, Disguised Forms, supra note 4. See infra notes 246-249 and ac-
companying text.
41
PACE LAW REVIEW
be "stampeded" into investment decisions without adequate no-
tice or information upon which to base their decisions.
2
"
For example, another provision of H.R. 5693 seeks to close
the "13D ten-day window.
' 246
Under existing law, an investor
has ten days in which to file Schedule 13D after becoming a five
percent beneficial owner of stock in a company.
247
Because of
current abuses of this disclosure loophole, the SEC has indicated
its intent to close the 13D window by requiring next day fil-
ing.
2 48
H.R. 5693 would give the SEC the authority to accom-
plish this task.
24
'
The legislature has also eliminated other types of surprise
raids by raiders who acquire large blocks of stock in short peri-
ods of time. Section 14(d) of the Williams Act largely eliminated
a tactic known as the "Saturday Night Special" named after the
guns used during weekend robberies.
250
This practice involved
gathering firm commitments from major target company share-
holders during the weekend in order to obtain a control block
before the target company could rally its forces.
25 1
This tactic
has been eliminated by the disclosure and minimum offering pe-
riod requirements of section 14(d).
252
H.R. 5694,253 to be discussed infra, was also drafted with
245. See infra notes 246, 250, 254 and accompanying text.
246. See 17 C.F.R. 240.13d-l(a) (1985).
247. Id.
248. See Hearings, supra, note 27, at 26 (Committee Recommendations and the
Commission's Positions and Contemplated Actions):
[tihe Commission endorses closing the 10-day window period in Section 13(d).
The Commission opposes a pre-acquisition filing requirement, because of its effect
on the transferability of blocks of stock. The Commission proposes instead a re-
quirement of immediate public announcement, next day filing of the Schedule
13D and/or a standstill until filing. The Commission's proposal will require an
amendment to the Exchange Act.
Id.
The "Saturday Night Special" is a hostile tender offer that gives target sharehold-
ers a very short period of time in which to decide whether to tender. The goal of
such a device is to stampede the shareholders into tendering before target man-
agement has a chance to galvanize into action in opposition to the bid.
Id. See also Prentice, supra note 79, at 338 n.9.
252. See 15 U.S.C.A. 78n(e) (West 1981).
253. 98th Cong. 2d Sess., 130 CONG. REc. H4357-60 (daily ed. May 22, 1984); see also
app. B, infra.
[Vol. 6:69
GREENMAIL
the intent to eliminate another tactic employed by raiders to
gain fast control over a target. The draft bill was intended to
eliminate the "front-end two step takeover" and the "bootstrap"
(or "toehold") tactics.
84
Since greenmail often results from an actual or perceived
threat associated with large, fast accumulations of stock, it
stands to reason that the two-year holding period requirement
would identify most greenmailers. The provision would also en-
able companies to repurchase stock, without requiring a share-
holder vote, from long term dissident shareholders (as opposed
to greenmailers) who held their block of stock longer than two
years.
Although the three-percent stake and two-year holding re-
quirements of H.R. 5693 appear to adequately address the
source of the greenmail threat, the bill fails in three respects.
First, under the provisions of H.R. 5693, the shareholders of the
target become the ultimate decision-makers as to whether or not
greenmail should be paid
25 8
Many commentators have argued
the pros and cons of permitting shareholders to ratify defensive
maneuvers of target management.
2 6
Shareholder interests may,
at times, diverge from the interests of the corporation, making
shareholder ratification a dubious requirement. For example,
once a tender offer has been made by a raider, shareholders may
have little incentive to ratify a greenmail payment since this
would extinguish the offer or possibility of a takeover. Statistics
indicate that stock values rise during tender offers, often due to
speculation that a takeover will occur.
25 7
In this situation, share-
holders might be more inclined to ride the crest of the stock
market rather than to vote for a greenmail payment which
would preserve the status quo of the corporation.
H.R. 5693 suffers a second, more serious, defect. The Rea-
gan Administration opposed H.R. 5693 on the grounds that the
bill would cause an unnecessary and unlawful intrusion of fed-
eral securities laws into the area of corporate governance tradi-
254. See Hearings, supra note 27, at 155-56 (statement of Martin Lipton who sub-
mitted H.R. 5694 as a draft amendment to the Williams Act).
256. See, e.g., Fischel, The Corporate Governance Movement, 35 VAND. L. REv. 1259
(1982); Harrington, supra note 166, at 1014.
257. See supra notes 2, 77, 81 and accompanying text.
19851
43
tionally relegated to the states.5
8
By mandating shareholder rat-
ification and preventing target management from making certain
stock repurchases, the bill arguably interferes with state corpo-
ration law.
6 9
The Administration's objection to the bill appears
to be founded on a tenth amendment argument that such legis-
lation would unnecessarily intrude on state sovereignty. Federal
securities laws derive from Congress' authority to regulate under
the Commerce Clause of the United States Constitution.
6 0
An
argument might be advanced that if greenmail could be shown
to have an effect on stock prices, and thus on interstate com-
merce, Congress would be empowered to regulate. The problem
with this approach is that there exists no solid empirical evi-
dence that greenmail payments cause the decline in prices after
the announcement of a greenmail payment.
26 1
Given this defi-
ciency in this argument, there may be little basis on which to
grant federal legislative authority beyond mere disclosure
requirements.
2 2
H.R. 5693 appears to suffer from a third defect. By requir-
258. See Letter from U.S. Treasury Secretary Donald Regan to Rep. John Dingell
(D-Mich.), Chairman of the House Committee on Energy and Commerce (September 25,
1984):
[w]e are also concerned about proposals to regulate potentially abusive defen-
sive tactics by target corporations, which raise a separate set of issues that rein-
force the need to proceed with caution. Given the success that we as a nation have
had with over 100 years of State corporate law and the large body of case law that
have been developed during that time, we believe that Federal regulation of cor-
porate management should be considered only where a serious market failure of
national dimensions has occurred, or where some broader national purpose is to be
served. With respect to the provisions in H.R. 5693 relating to defensive tactics,
we believe that the case for such market failure of broad national purpose has not
yet been made.
Id.
See generally, Low, Reagan Said to Question Greenmail Curbs, L.A. Daily J., July
23, 1984, at 3, col. 1; Scheibla, Greenmail Debate Heats Up Behind the Scenes, BAR-
RON'S, Sept. 3, 1984, at 17; "Greenmail" Bill Opposed, N.Y. Times, Sept. 26, 1984, at
D15, col. 6.
260. The Securities Act of 1933 and Secutities Exchange Act of 1934 predicate
prohibitions on use of the mails or interstate commerce. See, e.g., 5, 12 and 17 of the
Securities Act of 1933; and 2 of the Securities Exchange Act of 1934.
261. See supra notes 2, 75, 77, 78 and accompanying text for conflicting views on
the net effect of the stock price drop subsequent to the announcement of the greenmail
payment.
262. The Williams Act was enacted to close the gap in disclosure requirements of
the federal securities laws. Piper v. Chris-Craft Indus., 430 U.S. 1, 22 (1977).
GREENMAIL
ing shareholder ratification of the greenmail payment, it may
easily be argued that the bill effectively deprives management of
one of its defensive tactics. As a result, the raider may gain the
advantage of time to accumulate an even greater block of stock
while the target tries to mobilize a shareholder vote. This would
appear to "tip the balance" of strategic advantage in favor of the
raider, contrary to the express intent of the Williams Act.
263
In conclusion, H.R. 5693 is problematic in its present form
because it interferes unnecessarily in the relationship between
target management and shareholders. However, the three-per-
cent stake and two-year holding requirements are useful indica-
tors of greenmail activity.'"
B. H.R. 5694
H.R. 5694,26
5
based upon a proposal by New York attorney
266 inrdc
Martin Lipton, was introduced at the same time as H.R.
569367 but was not approved as a draft bill by the House Com-
mittee on Energy and Commerce. This proposed bill would have
prohibited the acquisition of more than ten percent of a com-
pany's shares unless a tender offer was made for all outstanding
shares in the company.
" 8
The bill was designed to alleviate sev-
eral perceived evils including greenmail, creeping tender offers
(whereby a raider gradually acquires stock on the open market),
and two-tier offers (whereby the raider makes a generous front-
ended offer in cash and a low offer for the remainder of the
265. 98th Cong., 2d Sess., 130 CONG. REC. H4357-60 (daily ed. May 22, 1984); see
also app. B, infra.
266. Martin Lipton is a partner in the law firm of Wachtell, Lipton, Rosen & Katz
in New York City and a member of the SEC Advisory Committee on Tender Offers.
268. See Hearings, supra note 27, at 210 (statement by Rep. Matthew Rinaldo (D-
N.J.)). A number of other proposals have been made which similarly call for a ceiling on
stock accumulations and a mandatory tender offer to all shareholders by the acquisitor.
Id. at 26 (SEC Advisory Committee on Tender Offers proposed a 20% ceiling); Hon.
Goldberg, Regulation of Hostile Tender Offers: A Dissenting View and Recommended
Reforms, 43 MD. L. Rav. 225, 234 (1984) (recommending a 15% ceiling); Williams, Busi-
ness Seek to End 'Greenmail', 'Golden Parachutes', Wall St. J., Jan. 23, 1985, at 31
(Andrew Sigler, head of the Business Roundtable, recommending a five to ten percent
ceiling).
19851
45
PACE LAW REVIEW
stock tendered).
6
'
According to Mr. Lipton, "The culprit is a regulatory sys-
tem that permits accumulations in excess of 10 percent."
' 270
He
testified at the House Subcommittee on Telecommunications,
Consumer Protection and Finance hearings that H.R. 5694
would create a substantial disincentive for raiders to threaten
greenmail.
271
He stated:
[i]t [H.R. 5694] also effectively eliminates the greenmail problem.
If a raider or a group of raiders cannot accumulate more than 10
percent of a target's shares, there is no real threat of a change of
control transaction without all shareholders being treated equally,
and therefore no reason for the target to buy back the shares. The
target will not buy. The greenmailer has no incentive to
accumulate.
2 72
H.R. 5694 has several advantages. First, by creating a ceil-
ing on stock acquisitions, the bill would appear to confront the
greenmail threat at its most basic level. A raider cannot create
the illusion of a takeover threat by continuing to accumulate
stock
278
because there is no further need to "call his bluff" by
paying the greenmail. Once he has acquired ten percent of the
outstanding stock, he has no choice but to make a tender for all
the remaining stock. Second, H.R. 5694 would eliminate the
need for fair price provisions in corporate charters
275
and state
legislation, since a uniform tender offer would have to be
made to all stockholders
by the raider.
2 77
However, H.R. 5694 also suffers from several shortcomings.
First, it is not entirely clear that a mandatory tender offer, once
the raider acquired ten percent, would prevent the raider from
269. See Hearings, supra note 27, at 155-57 (statement by Martin Lipton).
270. Id. at 156.
271. Id. at 157.
272. Id.
275. See supra note 89 and accompanying text. "A fair price provision in a corpo-
rate charter generally requires supermajority approval for certain business combinations
and may set minimum price criteria for mergers." Moran v. Household Int'l., Inc., 490
A.2d 1059, 1064 n.1 (Del. Ch. 1985).
276. See Hearings, supra note 27, at 285. See also supra note 145 and accompany-
ing text.
[Vol. 6:69
GREENMAIL
threatening a takeover unless greenmail were paid. For example,
a raider could still acquire five percent of the stock and manage-
ment, fearful that he would continue to acquire stock up to the
ten percent margin, would probably be receptive to a suggestion
that greenmail be paid to avoid the inevitable tender offer when
the raider acquired ten percent. The three-percent trigger in
H.R. 569378 appears to confront the issue of the perceived
threat
27 9
at a more appropriate, earlier stage in the stock
accumulation.
Second, H.R. 5694 would also have serious consequences for
raiders and passive investors. The bill would impose a financial
hardship on raiders who would be obliged to make a tender offer
upon accumulating ten percent. Any raider without sufficient re-
sources to make such a tender offer would be precluded from
ever gaining control of the corporation. Undoubtedly, this would
limit the number of raiders who would be able to instigate a
change in control. This in turn might tend to entrench manage-
ment. Moreover, the concept of a passive investor with a ten
percent or greater stake in a company would become obsolete.
Passive investors would be forced to make tender offers despite
a lack of desire to do so. In effect, upon the accumulation of a
ten-percent stake, H.R. 5694 institutionalizes a mandatory
tender offer process in the securities investment marketplace.
Finally, H.R. 5694 appears to interfere with state corpora-
tion law.
2 80
By limiting the voting power of the shareholders to
ten percent of the outstanding voting securities, unless a tender
offer is made to all shareholders, the bill interferes with the vot-
ing provisions of most corporate charters. Perhaps recognizing
this inherent weakness in his draft proposal for federal legisla-
tion, Mr. Lipton has also advocated a non-legislative solution to
the greenmail problem.
28
Mr. Lipton has suggested that corpo-
279. See generally supra notes 37-44 and accompanying text.
281. Mr. Lipton's three-prong charter amendment proposal was designed to elimi-
nate greenmail, bust-ups and front-end loaded bootstrap takeovers. First, he proposes a
charter amendment that limits any holder or related group with five percent or more,
but less than ninety percent, of the common stock to only five percent of the voting
power for a three-year period after the five percent acquisition. Second, this provision
would be complimented with another which would assure that all shareholders would
have submitted to them a high premium unconditional cash offer for all the stock of the
1985]
47
rations could adopt charter amendments to limit the voting
power of major shareholders and impose fair price restrictions
on tender offers to the corporation.
2
This proposal accom-
plishes the essential purposes of H.R. 5694 but avoids the regu-
latory interference with corporate charters.
In sum, H.R. 5694 appears to be an imperfect solution to
the greenmail problem.
83
Similar measures might be useful,
however, if adopted in the form of charter amendments by the
target companies on a voluntary basis.
8
" If the shareholders of a
corporation voted to adopt such measures then raiders and pas-
corporation. Third, there would be a "sunset provision" to ensure that the two other
provisions would expire at the end of five years subject to renewal. See Lipton, Green-
mail, Bust-Up Takeovers - A Discussion Memorandum, N.Y.L.J., Sept. 7, 1984 at 1, col.
3.
Mr. Lipton's proposal was criticized in two published responses to his article. Edwin
Mishkin, a partner in the law firm of Cleary, Gottlieb, Steen and Hamilton, in New
York, articulated his concern that the proposal would operate as a deterrent to proxy
contests and that such limitations on voting rights of shareholders would be subject to
state law limitations. He also stated that the proposal would entrench management. See
Mishkin, Greenmail, Bust-Up Takeovers - Comment on the Lipton Proposal, N.Y.L.J.,
Sept. 18, 1984, at 1, col. 3.
The proposal was also attacked by Stephen Hochman who argued that regulatory
focus should be placed on management and not the acquisitor. See Hochman, Comment
on Greenmail and Bust-up Takeovers (letter to editor), N.Y.L.J., Sept. 14, 1984, at 2,
col. 5.
283. See supra note 280 and accompanying text. See generally, LeBaron & Strass-
man, 'Greenmail' Takeover Threats: Shareholders, Economy Benefit, L.A. Daily J., Apr.
20, 1984, at 4, col. 3.
Proposals to limit single-party ownership of a block of a corporation's stock
were considered and resoundingly rejected by the [SEC] advisory committee. In
dismissing any arbitrary limitation, the committee recognized the common inter-
national practice of interlocking business relationships. A domestic example would
be IBM's recent purchase of a twenty-percent interest in one of its suppliers,
Intel.
More importantly, however, investors who believe that assets are undervalued
should not be prevented arbitrarily from making their will as minority sharehold-
ers known.
Id.
284. Martin A. Siegel, vice president of Kidder, Peabody & Co., has also advocated
the use of charter amendments to curb greenmail. He has urged corporations to adopt a
charter amendment requiring a shareholder majority vote prior to any purchase by the
company of shares held by a five percent or more stakeholder at a premium. This ap-
pears to resemble a modified H.R. 5693 in charter amendment form. See generally
Meisler, Mergers and Divestitures: The Pace Quickens, FoRBEs, Dec. 3, 1984, at 91;
Siegel, How to Foil Greenmail, FORTUNE, Jan. 21, 1985, at 157; Hearings, supra note 27,
at 446 (letter from Martin Siegel to Rep. Timothy Wirth, May 16, 1984).
GREENMAIL
sive investors alike would not be unwittingly prejudiced by the
voting restrictions.
C. H.R. 5695
H.R. 5695285 was introduced in the House of Representa-
tives with H.R. 5693 and H.R. 5694 but like H.R. 5694, was not
approved as a draft bill by the House Committee on Energy and
Commerce.
2 8
6 H.R. 5695 differs from the other two bills in that
it would not restrain the raider or target, but rather it would
permit shareholders and the SEC to seek injunctive relief from
harmful defensive tactics by management in takeover situa-
tions.
2 87
Furthermore, H.R. 5695 would place the burden of
proof on target management to show by a preponderance of the
evidence that the transaction complained of was both prudent
and fair.
88
H.R. 5695 would alter most current law under the business
judgment rule, as discussed in Section III(B)(4), supra. The bill
would, in effect, recognize an inherent conflict of interest in any
management decision in a takeover situation and cause the bur-
den of proof to shift immediately to management to prove the
fairness of the transaction. Currently, most federal and state
courts have required the complaining shareholder to bear the in-
itial burden of proof and show that management has breached
its duty of loyalty by engaging in an activity involving a conflict
of interest.
89
The result of this approach has been that many
shareholders are unable to overcome the first hurdle in the law-
suit, and are unable to demonstrate a traditionally recognized
conflict of interest beyond merely a motive to retain control.
29
By shifting the burden to management in takeover situations,
the bill would aid shareholders in overcoming the initial burden
of proof.
One of the advantages of H.R. 5695 is that it does not at-
tempt to define greenmail or prohibit the practice outright. Im-
285. 98th Cong., 2d Sess., 130 CONG. REC. H4357-60 (daily ed. May 22, 1984). See
also app. C, infra.
287. Id.
288. Id.
19851
49
PACE LAW REVIEW
plicit in the bill is a recognition that some defensive maneuvers
are justifiable and, in some cases, desirable. As has been dis-
cussed, supra,
2 9 1
greenmail often cannot be sufficiently isolated
from other beneficial stock repurchases by the issuing company.
Moreover, greenmail may sometimes be an attractive option to
thwart a hostile takeover. Thus, the bill would preserve the
practice of greenmail as long as it could be justified as being in
the best interests of the corporation. This approach maintains
freedom in the marketplace, and places no restrictions upon ei-
ther target or raider. Moreover, the bill enhances the protection
of the shareholder by making it easier to bring an action against
management for the payment of greenmail.
However, while H.R. 5695 appears to be a partially worka-
ble solution to the problem of greenmail, the emergence of the
Norlin case
29 2
has made the need for this legislation less appar-
ent. In Norlin, as discussed supra, the Second Circuit Court of
Appeals implemented an almost identical burden-shifting rule
for the application of the business judgment rule in takeover sit-
uations.
2 9 3
Since H.R. 5695 would only apply to federal district
courts, there seems little reason to adopt legislation to accom-
plish essentially the same goal.
294
292. Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255 (2d Cir. 1984).
294. Several other proposals to resolve the problem of abuses of defensive tactics by
corporate management have also been profferred. Marc I. Steinberg, associate professor
at the University of Maryland School of Law, has suggested that target management
should be permitted to make defensive moves during the takeover process, but once
these moves materially impede or preclude shareholders from tendering their shares to a
particular bidder, then management should be required to prove, under the business
judgment rule, that its actions were fair to the corporation and its shareholders. It ap-
pears that a plaintiff in this situation must at least meet the burden of proving that the
defensive strategy, such as payment of greenmail, impeded or precluded him from
tendering his shares. See Steinberg, supra note 211, at 248.
Frank H. Easterbrook, professor of law at the University of Chicago, and Daniel R.
Fischel, professor of law at Northwestern University, have suggested that in.lieu of ap-
plying the business judgment rule, target management should be strictly prohibited from
engaging in defensive tactics during a tender offer. This "passivity proposal" is offered
on the grounds that it produces economic benefits for the raider and the target company
shareholders. The raider is able to acquire the target at its undervalued price and the
shareholders get a premium over the market price for their tendered shares. See Easter-
brook & Fischel, The Proper Role of a Target's Management in Responding to a Tender
Ofler, 94 HARv. L. REv. 1161, 1194 (1981). This view has been criticized by Martin Lip-
ton. See Lipton, Takeover Bids in the Target's Boardroom: A Response to Professors
[Vol. 6:69
GREENMAIL
V. Conclusion
As this Comment has demonstrated, the need for some sort
of regulation of greenmail exists. The commercial sector has
proffered some new initiatives to regulate the practice, but none
have been implemented to date. Federal securities laws and SEC
regulations do not regulate greenmail. State corporation laws do
not impose buyback restrictions on target companies beyond
minimal legal capital requirements. State takeover laws, al-
though they have potential to regulate greenmail or to indirectly
affect it by imposing stock accumulation restrictions, are subject
to constitutional uncertainty since the MITE decision was is-
sued.
2 3
Common law decisions have generally been lax in apply-
ing the business judgment rule to decisions made by manage-
ment during hostile takeover attempts. The most notable
exception to this, however, has been the Second Circuit's deci-
sion in the Norlin
case.
2 96
This Comment has analyzed three proposed federal bills,
H.R. 5693,97 H.R. 5694298 and H.R. 5695,99 to amend the Secur-
ities and Exchange Act of 1934. All of the bills would have a
potential impact upon greenmail. All of the bills contain flaws. A
variety of other proposals to amend other sections of the federal
securities, anti-trust and tax laws have also been raised by legal
scholars as possible solutions to the greenmail problem.
300
This
Easterbrook and Fischel, 55 N.Y.U. L. REv. 1231, 1233 (1980).
295. Edgar v. MITE Corp., 457 U.S. 624 (1982); see supra notes 147-150 and accom-
panying text.
296. Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255 (2d Cir. 1984); see supra notes
214-224 and accompanying text.
297. See app. A, infra.
298. See app. B, infra.
299. See app. C, infra.
300. The House Committee on Energy and Commerce suggested, in its report ac-
companying H.R. 5693 (see HoUsE REPfOT, supra note 7, at 16), that section 14(e) of the
Securities Exchange Act of 1934 may have more application than simply that of mandat-
ing disclosure. Section 14(e) prohibits "manipulative acts." The courts have given recent
indications that such an interpretation may be given substantive effect. See Mobil v.
Marathon Oil Co., 669 F.2d 366 (6th Cir. 1981). But see Schreiber v. Burlington North-
ern, Inc., 731 F.2d 163 (3d Cir. 1984); Data Probe Acquisition Corp. v. Datalab, Inc., 722
F.2d 1 (2d Cir. 1983), cert. denied, 104 S. Ct. 1326 (1984); Buffalo Forge Co. v. Ogden
Corp., 717 F.2d 757 (2d Cir.), cert. denied, 464 U.S. 1018 (1983); Chris Craft Indus., Inc.
v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir.), cert. denied, 441 U.S. 910 (1973); Martin
Marietta Corp. v. Bendix Corp., 549 F. Supp. 623 (D. Md. 1982).
1985]
51
PACE LAW REVIEW
Comment has not attempted to examine these solutions and has
attempted to focus merely on the three draft legislative bills.
Federal legislators need not "pass the buck" to state legisla-
tors or to the courts to regulate greenmail. However, they must
be mindful of the potential for intrusion into areas traditionally
regulated by non-federal authority. As this Comment has indi-
cated, the problem with much of the proposed federal legislation
is that it attempts to regulate target management and share-
holder relations, an area traditionally left to state law. Similarly,
it is not necesary to legislate a burden-shifting mechanism such
as that proposed in H.R. 5695, when the courts have already em-
barked upon a similar course.
30 1
While the complexity of the greenmail problem stems from
the overlapping areas of federal, state and common law, it
stands to reason that the solution may emerge piecemeal from
all quarters. This author proposes the following solution to the
greenmail problem.
First, the disclosure requirements of section 13(d) of the
Exchange Act3
0 2
should be changed to require earlier disclosure
of stock accumulations. Currently, a beneficial owner of more
than five percent of a class of securities is required to file a
Other commentators have suggested that section 16(b) of the Securities Exchange
Act of 1934, governing insider trading, could be amended so as to curtail the practice of
greenmail. See Block & Barton, Section 16(b) of the Exchange Act: An Archaic Insider
Trading Statute in Need of Reform, 12 SEc. REG. L.J. 203 (1984); Klein, Outsider Pro-
poses Changes in Insider Trading Bill, Legal Times of Wash., Dec. 12, 1983, at 8;
Thomas, Indecent Recklessness: 'Greenmail', A New Form of Old Cynicism, 97 L.A.
Daily J., June 28, 1984, at 4, col. 3.
Still other commentators have suggested that an alteration in the pre-merger notifi-
cation and waiting period requirements of the Hart-Scott-Rodino Antitrust Improve-
ments Act, which amended 7 of the Clayton Act in 1976, could effectively be used to
deter greenmail and other takeover tactics. See generally Goldberg, supra note 268, at
227 n.13; Hearings, supra note 43, at 46 (SEC Tender Offer Advisory Committee
recommendation).
Recent tax reform proposals may also have a secondary impact on greenmail. There
has been a great deal of debate as to whether raiders who acquire target companies
ought to be permitted to use the carryover losses from the purchased company. Other
tax developments may make corporate restructuring by the target company more diffi-
cult. See generally Hous. REPORT, supra, note 7, at 13; The Tax Muddle that Could
Spur More Takeovers, Bus. WK., May 14, 1984, at 166; Spinoffs Can be Used to Avoid a
Hostile Takeover, J. TAX'N, Sept. 1984, at 186.
302. 15 U.S.C.A. 78m(d) (West 1981).
[Vol. 6:69
GREENMAIL
Schedule 13D1
3
containing information including whether a
"control purpose
'
"304 is contemplated.
An exception should be
created requiring all beneficial owners of three percent or more
of a class of securities held for less than two years to file a
Schedule 13D. Thus utilizing the "trigger requirements" of H.R.
5693,
1
5 shareholders would be put on notice that a purchaser is
making rapid stock accumulations. This would alert sharehold-
ers to the potential threat posed by the purchaser. More impor-
tantly, if the purchaser indicates on the Schedule 13D that "no
control purpose is contemplated,"
any greenmail payment by
management may be more easily challenged as irrational or non-
beneficial to corporate interests since it was not paid as a protec-
tive measure.
Secondly, the SEC should adopt regulations, pursuant to its
authority under section 13(e) of the Williams Act,
306
to mandate
disclosure by the issuer of its intent to repurchase any of its se-
curities at a premium over market price from any shareholder
holding three percent or more of a class of securities for less
than two years. Again, using the three-percent stake and two-
year holding triggers proposed in H.R. 5693, the SEC could thus
close the most significant loophole in its issuer repurchase regu-
lations. This would tend to identify the bulk of the pre-tender
offer greenmail payments not currently regulated by disclosure
requirements. The advantages of this type of regulation are nu-
merous. First, by limiting the regulation to pure disclosure, state
corporation law which has traditionally regulated management
behavior
3 0 7
is not impinged upon. Second, since the regulations
merely require an informational disclosure, there is no danger
that the delicate balance between target and raider will be
"tipped" in violation of the Williams Act.
308
Third, such a regu-
lation would not attempt to penalize the raider for indulging in
purely acceptable activities such as accumulating stock or ac-
cepting an above-market premium for the sale of his stock. Nor
is the raider punished or prevented from threatening a takeover,
306. 15 U.S.C.A. 17m(e) (West 1982).
19851
53
PACE LAW REVIEW
tender offer or proxy contest, for until such threats are deemed
"unlawful
demands"
0 9
there is little reason to regulate the
raider's behavior. As long as the Williams Act sanctions hostile
takeovers and tender offers, there is minimal likelihood that the
"threat" of such behavior will be considered "unlawful." Fourth,
by mandating earlier disclosure of the issuer's intent to repur-
chase its stock in advance of the actual payment, shareholders
would then have an opportunity to seek injuctive relief in the
courts.
Third, Congress should clarify the meaning of "manipula-
tive acts" under section 14(e) of the Exchange Act
10
to encom-
pass greenmail payments. The section currently provides in rele-
vant part:
[iut shall be unlawful for any person to make any untrue state-
ment of a material fact or omit to state any material fact neces-
sary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading, or to
engage in any fraudulent, deceptive, or manipulative acts or prac-
tices, in connection with any tender offer or request or invitation
for tenders
.... 311
The term "manipulative" is no where defined in the Exchange
Act or Williams Act. However, in its recent decision in Schreiber
v. Burlington Northern, Inc.,
1 s
the United States Supreme
Court resolved a conflict in the circuit courts by concluding that
misrepresentation or nondisclosure is a necessary element of a
section 14(e) violation.
313
The Court rejected the plaintiff's argu-
ment that the term "manipulative" assumes a different meaning
under section 14(e) than under section 10(b).
14
The plaintiff
contended that the use of the disjunctive "or" in section 14(e)
led to the implication that manipulative acts need not be "de-
ceptive" or "fraudulent."
315
Relying on its interpretation of "ma-
nipulative" under section 10(b) in Santa Fe Industries v.
310. 15 U.S.C.A. 17n(e) (West 1982).
311. Id.
312. 105 S. Ct. 2458 (1985).
313. Id. at 2465.
314. Id. at 2462.
315. Id.
[Vol. 6:69
GREENMAIL
Green,"
1 6
the Court held that the term "manipulative" under
section 14(e) likewise must include misrepresentation or
nondisclosure.
3 17
Congress should carve out an exception to this interpreta-
tion of "manipulative" by stating that manipulative transactions
between issuer and shareholders, who have held at least three
percent of a class of securities for less than two years, need not
involve misrepresentation or nondisclosure. This would serve to
give complaining shareholders a cause of action to challenge
greenmail payments under the federal securities laws. The ex-
ception would also preserve current interpretations of the sec-
tion by excluding other defensive tactics engaged in by target
management unless misrepresentation or nondisclosure were ad-
equately shown.
Finally, armed with a section 13(e) disclosure by an issuer
that it was about to repurchase its stock at a premium, evidence
under section 13(d) that a payment might be paid to a share-
holder for his shares absent any "control purpose" on his part,
and a section 14(e) cause of action for "manipulative" acts, a
complaining shareholder could go into federal court seeking to
enjoin the payment of greenmail under federal securities laws.
In addition to these securities laws violations, the com-
plaining shareholder could claim a breach of fiduciary duty on
the part of the issuer's directors under the pendent jurisdiction
of the federal courts. Given recent developments in the burden-
shifting mechanism in business judgment cases, as spearheaded
by the Norlin decision,
31
courts will more likely be willing to
shift the burden of proof to management in the takeover con-
texts. The management must then show that the payment of
greenmail is in the best interests of the corporation and thus
would not amount to a breach of their fiduciary duty. In this
way, each instance of greenmail will be judged on a case by case
basis to determine whether or not it constitutes an abuse of
power on the part of target management.
This type of individual court review makes infinitely more
316. 430 U.S. 462, 476-77 (1977).
317. Schreiber, 105 S. Ct. at 2462 n.6.
318. Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255 (2d Cir. 1984); see supra note
214 and accompanying text.
1985]
55
PACE LAW REVIEW
sense than declaring a flat prohibition on greenmail.
3 19
The elu-
sive nature of the greenmail "threat" coupled with a basic diffi-
culty in isolating it from other beneficial stock repurchases
makes greenmail unsuitable for blanket prohibitions or rough
rule-of-thumb triggers for mandatory tender offers, such as H.R.
5694,320 or shareholder approval, such as H.R. 5693.21 The prob-
lem with greenmail has not been that it continues to exist as a
practice, but rather that when it becomes abusive, shareholders
have had no preemptive power or recourse once the payment is
made.
The author believes that this approach, combining federal
and common law, will permit other areas to develop at a more
conservative, less reactionary pace, and will create a sufficiently
sensitive legal mechanism to permit greenmail to flourish only
where it is considered a beneficial defensive tactic.
Nancy A. Lester-Lawson
319. This author disagrees with the suggestion that a "categorical ban" on greenmail
by federal legislation is the best solution to the problem. See Note, Greenmail: Targeted
Stock Repurchases and the Management-Entrenchment Hypothesis, 98 HARv. L. REv.
1045 (1985). This approach ignores the fact that many stock repurchases by an issuer
serve a variety of beneficial purposes, and may occasionally constitute a legitimate defen-
sive tactic under limited circumstances.
[Vol. 6:69
GREENMAIL
APPENDIX A
H.R. 5693 provides in relevant part:
It shall be unlawful for an issuer to purchase, directly or indi-
rectly, any of its securities at a price above the market from any
person who holds more than 3 per centum of the class of the se-
curities to be purchased and has held such securities for less than
two years, unless such purchase has been approved by the affirm-
ative vote of a majority of the aggregate voting securities of the
issuer, or the issuer makes an offer to acquire, of at least equal
value, to all holders of securities of such class and to all holders of
any class into which such securities may be converted ....
APPENDIX B
H.R. 5694 provides in relevent part:
It shall be unlawful for any person, directly or indirectly, by use
of the mails or by any means or instrumentality of interstate
commerce or of any facility of a national securities exchange or
otherwise, to acquire or agree to acquire any shares of any class of
voting equity securities of a corporation registered pursuant to
section 12 of this title, or any shares of any class of voting equity
securities of an insurance company which would have been re-
quired to be so registered except for the exemption contained in
section 12(g)(2)(G) of this title, or any shares of any class of vot-
ing equity securities issued by a closed-end investment company
registered under the Investment Company Act of 1940 if, after
consummation thereof, such person would, directly or indirectly,
be the beneficial owner of voting equity securities which would
entitle such person to cast 10 percent or more of the votes that all
holders of outstanding voting equity securities would be entitled
to cast in an election of directors of the issuer, unless such acqui-
sition shall be by means of a tender or exchange offer for all the
outstanding shares of common stock of the issuer. . ..
1985]
57
126 PACE LAW REVIEW [Vol. 6:69
APPENDIX C
H.R. 5695 provides in relevent part:
No issuer whose securities are registered under this title, or any
affiliate of any such issuer, shall engage in any transaction in con-
templation of effecting, or of defending against, a change in con-
trol of such issuer that is not prudent for the issuer and fair to
the issuer's shareholders. The Commission or any shareholder of
that issuer may bring a suit in the proper district court of the
United States or of the District of Columbia to enjoin any such
transaction and for such other equitable relief as may be appro-
priate. In any such suit, the burden shall be upon such issuer or
such affiliate to prove by a preponderance of the evidence that
the transaction complained of is both prudent for the issuer and
fair to the issuer's shareholders.

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